Endogenous Mergers under Multi-Market Competition
AbstractThis 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 355.
Date of creation: 2008
Date of revision:
Other versions of this item:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations
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)
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.:
- Corwin D. Edwards, 1955. "Conglomerate Bigness as a Source of Power," NBER Chapters, in: Business Concentration and Price Policy, pages 331-359 National Bureau of Economic Research, Inc.
- Scott, John T, 1982. "Multimarket Contact and Economic Performance," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 368-75, August.
- Scott,John T., 2005. "Purposive Diversification and Economic Performance," Cambridge Books, Cambridge University Press, number 9780521022583, December.
- Horn, Henrik & Persson, Lars, 2001.
"Endogenous mergers in concentrated markets,"
International Journal of Industrial Organization,
Elsevier, vol. 19(8), pages 1213-1244, September.
- Fauli-Oller, Ramon, 1997. "On merger profitability in a Cournot setting," Economics Letters, Elsevier, vol. 54(1), pages 75-79, January.
- Farrell, Joseph & Shapiro, Carl, 1990.
"Horizontal Mergers: An Equilibrium Analysis,"
American Economic Review,
American Economic Association, vol. 80(1), pages 107-26, March.
- Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
- Farrell, Joseph & Shapiro, Carl, 1988. "Horizontal Mergers: An Equilibrium Analysis," Department of Economics, Working Paper Series qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
- Ramón Faulí-Oller, 1997. "On merger profitability in a cournot setting," Working Papers. Serie AD 1997-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- 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.
- 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.
- Häckner, Jonas, 1999. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Research Papers in Economics 1999:9, Stockholm University, Department of Economics.
- Evans, William N & Kessides, Ioannis N, 1994. "Living by the "Golden Rule": Multimarket Contact in the U.S. Airline Industry," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 341-66, May.
- Juan Carlos Bárcena-Ruiz & María Begoña Garzón, 2003.
"Mixed Duopoly, Merger and Multiproduct Firms,"
Journal of Economics,
Springer, vol. 80(1), pages 27-42, 08.
- Fauli-Oller, Ramon, 2002. "Mergers between Asymmetric Firms: Profitability and Welfare," Manchester School, University of Manchester, vol. 70(1), pages 77-87, January.
- Zhiqi Chen & Thomas Ross, 2007. "Markets Linked by Rising Marginal Costs: Implications for Multimarket Contact, Recoupment, and Retaliatory Entry," Review of Industrial Organization, Springer, vol. 31(1), pages 1-21, August.
- B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
- Possajennikov, Alex, 2001. "Equilibrium selection in a merger game," Economics Letters, Elsevier, vol. 72(2), pages 255-261, August.
- Steven Pilloff, 1999. "Multimarket Contact in Banking," Review of Industrial Organization, Springer, vol. 14(2), pages 163-182, March.
- Cheung, Francis K., 1992. "Two remarks on the equilibrium analysis of horizontal merger," Economics Letters, Elsevier, vol. 40(1), pages 119-123, September.
- Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
- X. Wang & Jingang Zhao, 2010.
"Why are firms sometimes unwilling to reduce costs?,"
Journal of Economics,
Springer, vol. 101(2), pages 103-124, October.
- X. Henry Wang & Jingang Zhao, 2007. "Why Are Firms Sometimes Unwilling to Reduce Costs?," Working Papers 0703, Department of Economics, University of Missouri.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Randal Anderson).
If references are entirely missing, you can add them using this form.