Endogenous Mergers under Multi-Market Competition

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Endogenous Mergers under Multi-Market Competition

Author Info

Tina Kao (Australian National University)
Flavio Menezes (School of Economics, The University of Queensland)

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Flavio Marques Menezes

Abstract

This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play themselves out. The first is the selection effect, which works towards increasing welfare as shutting down the more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works towards increasing prices and, therefore, decreasing consumer surplus (but increasing producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 355.

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Date of creation: 2008
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Handle: RePEc:qld:uq2004:355

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Paper
- Tina Kao & Flavio Menezes, 2009. "Endogenous Mergers Under Multi-Market Competition," ANUCBE School of Economics Working Papers 2009-507, Australian National University, College of Business and Economics, School of Economics. [Downloadable!]

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-03-08 (All new papers)
NEP-COM-2008-03-08 (Industrial Competition)
NEP-MIC-2008-03-08 (Microeconomics)

References listed on IDEAS
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