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Consumer search costs and the incentives to merge under Bertrand Competition

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  • Moraga-Gonzalez, Jose L.

    ()
    (IESE Business School)

  • Petrikaite, Vaiva

    (University of Groningen)

Abstract

This paper studies the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search the market for satisfactory deals. In the pre-merger market equilibrium, all firms look alike and so the probability a firm is next in the queue consumers follow when visiting firms is equal across non-visited firms. However, after a merger, insiders raise their prices more than the outsiders, so consumers search for good deals first at the non-merging stores and only then, if they do not find any product satisfactory enough, 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 fewer customers, so mergers become unprofitable for sufficiently large search costs. This new merger paradox is more likely the higher the number of non-merging firms.

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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/934.

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Length: 40 pages
Date of creation: 11 Jul 2011
Date of revision:
Handle: RePEc:ebg:iesewp:d-0934

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
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Keywords: mergers; search; insiders; outsiders; order of search;

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  1. Maarten C.W. Janssen & Jose Luis Moraga-Gonzalez, 2007. "On Mergers in Consumer Search Markets," Tinbergen Institute Discussion Papers 07-054/1, Tinbergen Institute.
  2. 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.
  3. M. L. Weitzman, 1978. "Optimal Search for the Best Alternative," Working papers 214, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Zhou, Jidong, 2011. "Ordered search in differentiated markets," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 253-262, March.
  5. Simon P. Anderson & Regis Renault, 1999. "Pricing, product diversity, and search costs: a Bertrand-Chamberlin-Diamond model," Virginia Economics Online Papers 335, University of Virginia, Department of Economics.
  6. 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.
  7. Mark Armstrong & John Vickers & Jidong Zhou, 2008. "Prominence and Consumer Search," Economics Series Working Papers 379, University of Oxford, Department of Economics.
  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. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
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