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Mergers with Quality Differentiated Products

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  • Matthew J. Baker

    ()
    (United States Naval Academy)

  • Pamela M. Schmitt

    ()
    (United States Naval Academy)

Abstract

We consider the impact of merger on the equilibrium price and quality of products. Consumer demand for both products depends not only on own price and quality, but also on the price and quality of the other product. We consider both the case in which the merging firms produce gross complements, and the case in which the firms produce gross substitutes. In both cases, merger may lower or increase both product price and quality. In the case in which firms produce complementary products, it may happen that firms both lower price and increase product quality when merged. This happens when the cross quality elasticities of demand and the cross price elasticities of demand are equal in magnitude. Surprisingly, we also find that there are situations under which merger between firms producing substitutes increases welfare. For example, it is possible that merger between firms producing gross complements may result in higher product quality but lower social welfare, and merger between firms producing substitute products may result in lower product quality but higher social welfare.

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File URL: http://www.usna.edu/EconDept/RePEc/usn/wp/usnawp3.pdf
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Bibliographic Info

Paper provided by United States Naval Academy Department of Economics in its series Departmental Working Papers with number 3.

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Length: 32 pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:usn:usnawp:3

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  1. Pesendorfer, Martin, 2003. " Horizontal Mergers in the Paper Industry," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 495-515, Autumn.
  2. 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.
  3. Luis M. B. Cabral, 2001. "Horizontal Mergers With Free-Entry: Why Cost Efficiencies May Be a Weak Defense and Asset Sales a Poor Remedy," Working Papers 01-05, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. A. Dixit, 1977. "Quality and Quantity Competition," Working papers 198, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  6. Sheshinski, Eytan, 1976. "Price, Quality and Quantity Regulation in Monopoly Situations," Economica, London School of Economics and Political Science, vol. 43(17), pages 127-37, May.
  7. Schmalensee, Richard, 1987. "Horizontal Merger Policy: Problems and Changes," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 41-54, Fall.
  8. Allen N. Berger & Anil K. Kashyap & Joseph Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," Center for Financial Institutions Working Papers 96-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
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