Consumer Search Costs and the Incentives to merge under Bertrand Competition
AbstractThis paper studies the incentives to merge in a Bertrand competitionmodel where firms sell differentiated products and consumers search the marketfor satisfactory deals. In the pre-merger market equilibrium, all firms lookalike and so the probability a firm is next in the queue consumers follow whenvisiting firms is equal across non-visited firms. However, after a merger,insiders raise their prices more than the outsiders so consumers search forgood deals first at the non-merging stores and then, if they do not find anyproduct satisfactory enough, they continue searching at the merging stores.When search cost are negligible, the results of Deneckere and Davidson (1985)hold. However, as search costs increase, the merging firms receive fewercustomers so mergers become unprofitable for sufficiently large search costs.This new merger paradox is more likely the higher the number of non-mergingfirms.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-099/1.
Date of creation: 11 Jul 2011
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mergers; search; insiders; outsiders; order of search; prominence;
Other versions of this item:
- Moraga-Gonzalez, Jose L. & Petrikaite, Vaiva, 2011. "Consumer search costs and the incentives to merge under Bertrand Competition," IESE Research Papers D/934, IESE Business School.
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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