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Product Differentiation, Cost-Reducing Mergers, and Consumer Welfare

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  • George Norman
  • Lynne Pepall
  • Daniel Richards

Abstract

Cost synergies are an explicitly recognized justification for a two-firm merger and empirical techniques are now widely used to assess the impact of cost-reducing mergers on prices and welfare in the postmerger market. We show that if the merger occurs in a vertically product differentiated market then the merger will lead to a reduction in product offerings that limits the usefulness of pre-merger empirical estimates. Indeed, we further show that in such markets, two-firm merges will lead to higher prices regardless of the merger’s cost-savings. We show that our results may obtain even when we allow for post-merger entry.

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Bibliographic Info

Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0214.

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Date of creation: 2002
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Handle: RePEc:tuf:tuftec:0214

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Keywords: mergers; cost synergies; vertical product differentiation;

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References

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  1. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
  2. ANDERSON, Simon P. & de PALMA, André & THISSE, Jacques-François, . "Social surplus and profitability under different spatial pricing policies," CORE Discussion Papers RP -1009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  4. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Lynne Pepall & Dan Richards, 1999. "The Simple Economics of "Brand-Stretching"," Discussion Papers Series, Department of Economics, Tufts University 9905, Department of Economics, Tufts University.
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
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Cited by:
  1. Darlene C. Chisholm & George Norman, 2002. "Spatial Competition and Demand: An Application to Motion Pictures," Discussion Papers Series, Department of Economics, Tufts University 0216, Department of Economics, Tufts University.
  2. Cosnita-Langlais, Andreea, 2012. "Horizontal market concentration: Theoretical insights from spatial models," Research in Economics, Elsevier, vol. 66(1), pages 22-32.
  3. Richard Dagen & Daniel Richards, 2006. "Merger Theory and Evidence: The Baby-Food Case Reconsidered," Discussion Papers Series, Department of Economics, Tufts University 0602, Department of Economics, Tufts University.

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