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Welfare Enhancing Mergers under Product Differentiation

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Abstract

We follow the duopoly framework with differentiated products as in Singh and Vives (1984) and Zanchettin (2006) and examine the welfare effects of a merger between two asymmetric firms. We find that for quantity competition, the merger increases total welfare if the cost asymmetry falls into a specific range. Furthermore, this parameter range widens if the products are closer substitutes. On the other hand, mergers are never welfare enhancing in this setting when firms compete in prices.

Suggested Citation

  • Flavio Menezes & Tina Kao, 2007. "Welfare Enhancing Mergers under Product Differentiation," Discussion Papers Series 350, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uq2004:350
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    File URL: https://economics.uq.edu.au//files/44472/350.pdf
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    References listed on IDEAS

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    1. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919.
    2. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    3. David Hennessy, 2000. "Cournot Oligopoly Conditions under which Any Horizontal Merger Is Profitable," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 17(3), pages 277-284, November.
    4. Piercarlo Zanchettin, 2006. "Differentiated Duopoly with Asymmetric Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 999-1015, December.
    5. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-227, March.
    6. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    7. Hackner, Jonas, 2000. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Journal of Economic Theory, Elsevier, vol. 93(2), pages 233-239, August.
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    Cited by:

    1. Nisvan Erkal & Daniel Piccinin, 2010. "Welfare‐Reducing Mergers in Differentiated Oligopolies with Free Entry," The Economic Record, The Economic Society of Australia, vol. 86(273), pages 178-184, June.
    2. Choi, Pak-Sing & Espinola-Arredondo, Ana & Munoz, Felix, 2020. "Mergers as an environmental ally: Socially excessive and insufficient merger approvals," Working Papers 2020-1, School of Economic Sciences, Washington State University.
    3. Fikru, Mahelet G. & Gautier, Luis, 2016. "Mergers in Cournot markets with environmental externality and product differentiation," Resource and Energy Economics, Elsevier, vol. 45(C), pages 65-79.
    4. Choi, Pak-Sing & Espínola-Arredondo, Ana & Muñoz-García, Félix, 2022. "Environmental policy helping antitrust decisions: Socially excessive and insufficient merger approvals," Resource and Energy Economics, Elsevier, vol. 67(C).
    5. Apostolis Pavlou, 2015. "Learning by doing and horizontal mergers," Journal of Economics, Springer, vol. 116(1), pages 25-38, September.
    6. Pu†yan Nie, 2018. "Comparing Horizontal Mergers Under Cournot with Bertrand Competitions," Australian Economic Papers, Wiley Blackwell, vol. 57(1), pages 55-80, March.
    7. Jiyun Cao & Arijit Mukherjee & Uday Bhanu Sinha, 2020. "The implications of labour unions in the presence of a merger," Manchester School, University of Manchester, vol. 88(4), pages 575-583, July.
    8. Ana Espínola-Arredondo & Felix Munoz-Garcia & Ae Rin Jung, 2020. "Organic Mergers and Acquisitions," Journal of Industry, Competition and Trade, Springer, vol. 20(1), pages 59-91, March.
    9. Luis Gautier & Mahelet G. Fikru, 2022. "The Welfare Impact of New Firm Acquisitions," Journal of Industry, Competition and Trade, Springer, vol. 22(3), pages 535-559, December.
    10. Fikru, Mahelet G., 2016. "Modelling mergers among polluting firms when environmental policy is endogenous," Economic Analysis and Policy, Elsevier, vol. 49(C), pages 1-6.

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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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