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Endogenous Mergers Under Multi-Market Competition

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Tina Kao ()
Flavio Menezes

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Abstract

This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play out. The first is the selection effect, which acts to increase welfare, as shutting down the relatively more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works to increase prices and, therefore, decrease consumer surplus (but increasing producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.

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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANUCBE School of Economics Working Papers with number 2009-507.

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Length: 23 Pages
Date of creation: Oct 2009
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Handle: RePEc:acb:cbeeco:2009-507

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations

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  1. Horn, Henrik & Persson, Lars, 2001. "Endogenous mergers in concentrated markets," International Journal of Industrial Organization, Elsevier, vol. 19(8), pages 1213-1244, September. [Downloadable!] (restricted)
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  2. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter. [Downloadable!] (restricted)
  3. Fauli-Oller, Ramon, 2002. "Mergers between Asymmetric Firms: Profitability and Welfare," Manchester School, University of Manchester, vol. 70(1), pages 77-87, January. [Downloadable!] (restricted)
  4. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May. [Downloadable!] (restricted)
  5. Zhiqi Chen & Thomas Ross, 2007. "Markets Linked by Rising Marginal Costs: Implications for Multimarket Contact, Recoupment, and Retaliatory Entry," Review of Industrial Organization, Springer, vol. 31(1), pages 1-21, August. [Downloadable!] (restricted)
  6. Corwin D. Edwards, 1955. "Conglomerate Bigness as a Source of Power," NBER Chapters, in: Business Concentration and Price Policy, pages 329-358 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Evans, William N & Kessides, Ioannis N, 1994. "Living by the "Golden Rule": Multimarket Contact in the U.S. Airline Industry," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 341-66, May. [Downloadable!] (restricted)
  8. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March. [Downloadable!] (restricted)
  9. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March. [Downloadable!] (restricted)
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  10. Cheung, Francis K., 1992. "Two remarks on the equilibrium analysis of horizontal merger," Economics Letters, Elsevier, vol. 40(1), pages 119-123, September. [Downloadable!] (restricted)
  11. Steven Pilloff, 1999. "Multimarket Contact in Banking," Review of Industrial Organization, Springer, vol. 14(2), pages 163-182, March. [Downloadable!] (restricted)
  12. Possajennikov, Alex, 2001. "Equilibrium selection in a merger game," Economics Letters, Elsevier, vol. 72(2), pages 255-261, August. [Downloadable!] (restricted)
  13. Scott, John T, 1982. "Multimarket Contact and Economic Performance," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 368-75, August. [Downloadable!] (restricted)
  14. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring. [Downloadable!] (restricted)
  15. Hackner, Jonas, 2000. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Journal of Economic Theory, Elsevier, vol. 93(2), pages 233-239, August. [Downloadable!] (restricted)
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