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Endogenous Mergers under Multi-Market Competition

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

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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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Publisher Info
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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References listed on IDEAS
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  1. Scott, John T, 1982. "Multimarket Contact and Economic Performance," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 368-75, August. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
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This page was last updated on 2008-8-1.


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