Consumer search costs and the incentives to merge under Bertrand Competition
AbstractThis 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 InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/934.
Length: 40 pages
Date of creation: 11 Jul 2011
Date of revision:
mergers; search; insiders; outsiders; order of search;
Other versions of this item:
- Jose Luis Moraga-Gonzalez & Vaiva Petrikaite, 2011. "Consumer Search Costs and the Incentives to merge under Bertrand Competition," Tinbergen Institute Discussion Papers 11-099/1, Tinbergen Institute.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-09 (All new papers)
- NEP-BEC-2011-10-09 (Business Economics)
- NEP-COM-2011-10-09 (Industrial Competition)
- NEP-MKT-2011-10-09 (Marketing)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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