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Horizontal Mergers and Product Quality

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  • Kurt R. Brekke

    ()
    (Department of Economics, Norwegian School of Economics)

  • Luigi Siciliani

    ()
    (Department of Economics and Related Studies; and Centre for Health Economics, University of York)

  • Odd Rune Straume

    ()
    (Universidade do Minho - NIPE)

Abstract

Using a spatial competition framework with three ex ante identical firms, we study the effects of a horizontal merger on quality, price and welfare. The merging firms always reduce quality. They also increase prices if demand responsiveness to quality is sufficiently low. The non-merging firm, on the other hand, always responds by increasing both quality and prices. Overall, a merger leads to higher average prices and quality in the market. The welfare implications of a merger are not clear-cut. If the demand responsiveness to quality is sufficiently high, some consumers benefit from the merger and social welfare might also increase.

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Bibliographic Info

Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 07/2014.

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Date of creation: 2014
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Handle: RePEc:nip:nipewp:07/2014

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Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
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Keywords: Horizontal mergers; Quality; Spatial Competition;

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