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Search Costs, Demand-Side Economies and the Incentives to merge under Bertrand Competition

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  • Jose L. Moraga-Gonzalez

    (VU University Amsterdam)

  • Vaiva Petrikaite

    (University of Groningen)

Abstract

This paper studies the incentives to merge in a Bertrand competition model where firms sell differentiatedproducts and consumers search for satisfactory deals. In the pre-merger symmetricequilibrium, the probability that a firm is the next one to be visited by a consumer is equal acrossfirms not yet visited. However, in the short-run after a merger, because insiders raise their pricesmore than what the outsiders do, consumers start searching for good deals at the non-mergingstores. Only when they do not find any product satisfactory enough, they continue searching atthe merging stores. When search costs are sufficiently large, consumer traffic from the non-merging firms to the merged ones is so small that mergers become unprofitable. This new merger paradox,which is more likely the higher the number of non-merging firms, can be overcome in the mediumtolong-run if the merging firms choose to stock their shelves with all the products of the constituent firms, which generates sizable search economies. Such demand-side economies can conferthe merging firms a prominent position in the marketplace, in which case their price may even belower than the price of the outsiders. In that case, consumers visit first the merged entity andthe firms outside the merger lose out. Search cost economies may render a merger beneficial forconsumers and so overall welfare may increase.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-017/1.

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Date of creation: 21 Feb 2012
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Handle: RePEc:dgr:uvatin:20120017

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

Related research

Keywords: mergers; insiders; outsiders; short-run; long-run; consumer search; demand-side economies; economies of search; order of search; sequential search; prominence;

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  1. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
  2. Marco A. Haan & José L. Moraga‐González, 2011. "Advertising for Attention in a Consumer Search Model," Economic Journal, Royal Economic Society, vol. 121(552), pages 552-579, 05.
  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. Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter.
  5. Zhou, Jidong, 2009. "Prominence and Consumer Search: The Case With Multiple Prominent Firms," MPRA Paper 12554, University Library of Munich, Germany.
  6. Armstrong, Mark & Zhou, Jidong, 2011. "Paying for prominence," MPRA Paper 30529, University Library of Munich, Germany.
  7. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Prominence and consumer search," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 209-233.
  8. Zhou, Jidong, 2011. "Ordered search in differentiated markets," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 253-262, March.
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