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Consumer Search Costs and the Incentives to merge under Bertrand Competition

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Author Info

  • Jose Luis Moraga-Gonzalez

    (University of Groningen, ICREA, IESE)

  • Vaiva Petrikaite

    (University of Groningen)

Abstract

This 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 Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-099/1.

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Date of creation: 11 Jul 2011
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Handle: RePEc:dgr:uvatin:20110099

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Web page: http://www.tinbergen.nl

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Keywords: mergers; search; insiders; outsiders; order of search; prominence;

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  1. Anderson, S.P. & Renault, R., 1997. "Pricing, Product Diversity and Search Costs: A Bertrand-Chamberlin-Diamond Model," Papers 97.481, Toulouse - GREMAQ.
  2. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Prominence and consumer search," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 209-233.
  3. 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.
  4. M. L. Weitzman, 1978. "Optimal Search for the Best Alternative," Working papers 214, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Zhou, Jidong, 2009. "Ordered Search in Differentiated Markets," MPRA Paper 13397, University Library of Munich, Germany.
  6. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
  7. Maarten C.W. Janssen & Jose Luis Moraga-Gonzalez, 2007. "On Mergers in Consumer Search Markets," Tinbergen Institute Discussion Papers 07-054/1, Tinbergen Institute.
  8. Maria Arbatskaya, 2007. "Ordered search," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 119-126, 03.
  9. Wolinsky, Asher, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 493-511, August.
  10. Ali Hortacsu & Chad Syverson, 2003. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of the S&P 500 Index Funds," NBER Working Papers 9728, National Bureau of Economic Research, Inc.
  11. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
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