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Price Discrimination under Customer Recognition and Mergers

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  • Esteves, Rosa Branca
  • Vasconcelos, Helder

Abstract

This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in Behaviour-Based Price Discrimination (BBPD). From a merger policy perspective, this paper's main contribution is two-fold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price-discriminate), but has no effect on the outsider firm's profitability, thereby eliminating the so called `free-riding problem'. Second, this equilibrium merger is shown to increase industry profits at the expense of consumers' surplus, leaving total welfare unaffected. This then suggests that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7683.

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Date of creation: Feb 2010
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Handle: RePEc:cpr:ceprdp:7683

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Related research

Keywords: Behaviour-Based Price Discrimination; Customer Poaching; Horizontal Mergers;

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References

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  1. Morton I. Kamien & Israel Zang, 1987. "The Limits of Monopolization Through Acquisition," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 754, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Rosa Branca Esteves, 2007. "Pricing with Customer Recognition," NIPE Working Papers, NIPE - Universidade do Minho 27/2007, NIPE - Universidade do Minho.
  3. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, 9.
  4. Horn, Henrik & Persson, Lars, 1996. "Endogenous Mergers in Concentrated Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1544, C.E.P.R. Discussion Papers.
  5. Taylor, Curtis R, 2003. " Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 223-46, Summer.
  6. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
  7. Larry D. Qiu & Wen Zhou, 2007. "Merger waves: a model of endogenous mergers," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 214-226, 03.
  8. Russ Pittman, 2007. "Consumer Surplus as the Appropriate Standard for Antitrust Enforcement," CPI Journal, Competition Policy International, vol. 3.
  9. Rosa Branca Esteves, 2009. "A Survey on the Economics of Behaviour-Based Price Discrimination," NIPE Working Papers, NIPE - Universidade do Minho 5/2009, NIPE - Universidade do Minho.
  10. Rothschild, R. & Heywood, John S. & Monaco, Kristen, 2000. "Spatial price discrimination and the merger paradox," Regional Science and Urban Economics, Elsevier, vol. 30(5), pages 491-506, September.
  11. 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, MIT Press, vol. 98(2), pages 185-99, May.
  12. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
  13. Hart, Sergiu & Kurz, Mordecai, 1983. "Endogenous Formation of Coalitions," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 1047-64, July.
  14. Rosa Branca Esteves, 2007. "Customer Poaching and Advertising," NIPE Working Papers, NIPE - Universidade do Minho 12/2007, NIPE - Universidade do Minho.
  15. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  16. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
  17. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  18. Vasconcelos, Helder, 2006. "Endogenous mergers in endogenous sunk cost industries," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(2), pages 227-250, March.
  19. Yongmin Chen, 2008. "DYNAMIC PRICE DISCRIMINATION WITH ASYMMETRIC FIRMS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 56(4), pages 729-751, December.
  20. James D. Reitzes & David T. Levy, 1995. "Price Discrimination and Mergers," Canadian Journal of Economics, Canadian Economics Association, vol. 28(2), pages 427-36, May.
  21. Ramon Fauli-Oller, 2000. "Takeover Waves," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(2), pages 189-210, 06.
  22. Ramon Fauli-Oller, 2000. "Takeover Waves," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 189-210, 06.
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Cited by:
  1. Rosa-Branca Esteves & Sofia Cerqueira, 2014. "Behaviour-Based Price Discrimination under Advertising and Imperfectly Informed Consumers," NIPE Working Papers, NIPE - Universidade do Minho 08/2014, NIPE - Universidade do Minho.
  2. Rosa-Branca Esteves, 2014. "Behaviour-Based Price Discrimination with Retention Offers," NIPE Working Papers, NIPE - Universidade do Minho 09/2014, NIPE - Universidade do Minho.

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