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Endogenous Mergers Under Multi-Market Competition

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  • Tina Kao

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  • Flavio Menezes

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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Bibliographic Info

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

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

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  1. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March.
  2. Corwin D. Edwards, 1955. "Conglomerate Bigness as a Source of Power," NBER Chapters, in: Business Concentration and Price Policy, pages 331-359 National Bureau of Economic Research, Inc.
  3. Cheung, Francis K., 1992. "Two remarks on the equilibrium analysis of horizontal merger," Economics Letters, Elsevier, vol. 40(1), pages 119-123, September.
  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.
  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.
  6. Juan Carlos Bárcena-Ruiz & María Begoña Garzón, 2003. "Mixed Duopoly, Merger and Multiproduct Firms," Journal of Economics, Springer, vol. 80(1), pages 27-42, 08.
  7. Scott, John T, 1982. "Multimarket Contact and Economic Performance," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 368-75, August.
  8. Steven Pilloff, 1999. "Multimarket Contact in Banking," Review of Industrial Organization, Springer, vol. 14(2), pages 163-182, March.
  9. Fauli-Oller, Ramon, 2002. "Mergers between Asymmetric Firms: Profitability and Welfare," Manchester School, University of Manchester, vol. 70(1), pages 77-87, January.
  10. Häckner, Jonas, 1999. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Research Papers in Economics 1999:9, Stockholm University, Department of Economics.
  11. Persson, Lars & Horn, Henrik, 1998. "Endogenous Mergers in Concentrated Markets," Working Paper Series 513, Research Institute of Industrial Economics.
  12. 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.
  13. Possajennikov, Alex, 2001. "Equilibrium selection in a merger game," Economics Letters, Elsevier, vol. 72(2), pages 255-261, August.
  14. Fauli-Oller, Ramon, 1997. "On merger profitability in a Cournot setting," Economics Letters, Elsevier, vol. 54(1), pages 75-79, January.
  15. 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.
  16. Ramón Faulí-Oller, 1997. "On merger profitability in a cournot setting," Working Papers. Serie AD 1997-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  17. Scott,John T., 2005. "Purposive Diversification and Economic Performance," Cambridge Books, Cambridge University Press, number 9780521022583, November.
  18. 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.
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Cited by:
  1. X. Wang & Jingang Zhao, 2010. "Why are firms sometimes unwilling to reduce costs?," Journal of Economics, Springer, vol. 101(2), pages 103-124, October.

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