IDEAS home Printed from https://ideas.repec.org/a/bpj/bejtec/v19y2019i1p22n3.html
   My bibliography  Save this article

Endogenous Mergers in Markets with Vertically Differentiated Products

Author

Listed:
  • Gabszewicz Jean J.

    (CORE Université Catholique de Louvain, Louvain-la-Neuve, Belgium)

  • Marini Marco A.
  • Tarola Ornella

    (Department of Social and Economic Sciences, University of Rome La Sapienza, Piazzale Aldo Moro, 5,00185Rome, Italy)

Abstract

This paper studies the incentives of firms selling vertically differentiated products to merge. To this aim, we introduce a three-stage game in which, at the first stage, three independent firms can decide to merge with their competitors via a sequential game of coalition formation and, at the second and third stage, they can optimally revise their qualities and prices, respectively. We study whether such binding agreements (i.e. full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game, and analyze their effects on equilibrium qualities, prices and profits. We find that, although profitable, the merger-to-monopoly of all firms is not an outcome of the finite-horizon negotiation, where only partial mergers arise. Moreover, we show that all stable mergers always include the firm initially producing the bottom quality good and reduce the number of variants on sale.

Suggested Citation

  • Gabszewicz Jean J. & Marini Marco A. & Tarola Ornella, 2019. "Endogenous Mergers in Markets with Vertically Differentiated Products," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(1), pages 1-22, January.
  • Handle: RePEc:bpj:bejtec:v:19:y:2019:i:1:p:22:n:3
    DOI: 10.1515/bejte-2017-0001
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/bejte-2017-0001
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

    File URL: https://libkey.io/10.1515/bejte-2017-0001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Marco A. Marini, 2018. "Collusive agreements in vertically differentiated markets," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume II, chapter 3, pages 34-56, Edward Elgar Publishing.
    2. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2017. "Horizontal mergers and product quality," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(4), pages 1063-1103, November.
    3. Giulio Ecchia & Luca Lambertini, 1997. "Minimum Quality Standards and Collusion," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 101-113, March.
    4. Lommerud, Kjell Erik & Sorgard, Lars, 1997. "Merger and product range rivalry," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 21-42, November.
    5. Michael J. Mazzeo, 2002. "Product Choice and Oligopoly Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 221-242, Summer.
    6. Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 665-676, September.
    7. Sergio Currarini & Marco A. Marini, 2015. "Coalitional Approaches to Collusive Agreements in Oligopoly Games," Manchester School, University of Manchester, vol. 83(3), pages 253-287, June.
    8. Gabszewicz, Jean J. & Wauthy, Xavier Y., 2002. "Quality underprovision by a monopolist when quality is not costly," Economics Letters, Elsevier, vol. 77(1), pages 65-72, September.
    9. Kalyan Chatterjee & Bhaskar Dutia & Debraj Ray & Kunal Sengupta, 2013. "A Noncooperative Theory of Coalitional Bargaining," World Scientific Book Chapters, in: Bargaining in the Shadow of the Market Selected Papers on Bilateral and Multilateral Bargaining, chapter 5, pages 97-111, World Scientific Publishing Co. Pte. Ltd..
    10. Bonnisseau Jean-Marc & Lahmandi-Ayed Rim, 2006. "Vertical Differentiation: Multiproduct Strategy to Face Entry?," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-14, November.
    11. Ying Fan, 2013. "Ownership Consolidation and Product Characteristics: A Study of the US Daily Newspaper Market," American Economic Review, American Economic Association, vol. 103(5), pages 1598-1628, August.
    12. Mario Pezzino, 2010. "Minimum Quality Standards with More Than Two Firms Under Cournot Competition," The IUP Journal of Managerial Economics, IUP Publications, vol. 0(3), pages 26-45, August.
    13. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
    14. Ornella Tarola & Jean Gabszewicz & Didier Laussel, 2011. "To Acquire, or To Compete? An Entry Dilemma," Journal of Industry, Competition and Trade, Springer, vol. 11(4), pages 369-383, December.
    15. George, Lisa, 2007. "What's fit to print: The effect of ownership concentration on product variety in daily newspaper markets," Information Economics and Policy, Elsevier, vol. 19(3-4), pages 285-303, October.
    16. George Norman & Lynne Pepall & Daniel Richards, 2005. "Product differentiation, cost-reducing mergers, and consumer welfare," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1204-1223, November.
    17. Moldovanu, Benny, 1992. "Coalition-proof nash equilibria and the core in three-player games," Games and Economic Behavior, Elsevier, vol. 4(4), pages 565-581, October.
    18. Michael Mazzeo, 2003. "Competition and Service Quality in the U.S. Airline Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 22(4), pages 275-296, June.
    19. Ray, Debraj & Vohra, Rajiv, 1999. "A Theory of Endogenous Coalition Structures," Games and Economic Behavior, Elsevier, vol. 26(2), pages 286-336, January.
    20. Michaela Draganska & Michael Mazzeo & Katja Seim, 2009. "Beyond plain vanilla: Modeling joint product assortment and pricing decisions," Quantitative Marketing and Economics (QME), Springer, vol. 7(2), pages 105-146, June.
    21. Motta, Massimo, 1992. "Cooperative R&D and vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 10(4), pages 643-661, December.
    22. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2016. "Core existence in vertically differentiated markets," Economics Letters, Elsevier, vol. 149(C), pages 28-32.
    23. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2016. "Vertical Differentiation and Collusion: Cannibalization or Proliferation?," ETA: Economic Theory and Applications 232221, Fondazione Eni Enrico Mattei (FEEM).
    24. Luca Lambertini, 2000. "Technology and Cartel Stability under Vertical Differentiation," German Economic Review, Verein für Socialpolitik, vol. 1(4), pages 421-442, November.
    25. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    26. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2017. "Vertical differentiation and collusion: Pruning or proliferation?," Research in Economics, Elsevier, vol. 71(1), pages 129-139.
    27. Lambertini, Luca & Poddar, Sougata & Sasaki, Dan, 2002. "Research joint ventures, product differentiation, and price collusion," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 829-854, June.
    28. Jaskold Gabszewicz, Jean & Shaked, Avner & Sutton, John & Thisse, Jacques-Francois, 1986. "Segmenting the market: The monopolist's optimal product mix," Journal of Economic Theory, Elsevier, vol. 39(2), pages 273-289, August.
    29. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
    30. Liran Einav, 2010. "Not All Rivals Look Alike: Estimating An Equilibrium Model Of The Release Date Timing Game," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 369-390, April.
    31. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    32. Hackner, Jonas, 1994. "Collusive pricing in markets for vertically differentiated products," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 155-177, June.
    33. Yi, Sang-Seung, 1997. "Stable Coalition Structures with Externalities," Games and Economic Behavior, Elsevier, vol. 20(2), pages 201-237, August.
    34. Francis Bloch, 1995. "Endogenous Structures of Association in Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 537-556, Autumn.
    35. Steven T. Berry & Joel Waldfogel, 2001. "Do Mergers Increase Product Variety? Evidence from Radio Broadcasting," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 1009-1025.
    36. Belleflamme, Paul, 2000. "Stable Coalition Structures with Open Membership and Asymmetric Firms," Games and Economic Behavior, Elsevier, vol. 30(1), pages 1-21, January.
    37. Peters, Craig, 2006. "Evaluating the Performance of Merger Simulation: Evidence from the U.S. Airline Industry," Journal of Law and Economics, University of Chicago Press, vol. 49(2), pages 627-649, October.
    38. Andrew Sweeting, 2010. "The effects of mergers on product positioning: evidence from the music radio industry," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 372-397, June.
    39. Francis Bloch, 2002. "Coalitions and Networks in Industrial Organization," Manchester School, University of Manchester, vol. 70(1), pages 36-55, January.
    40. Katja Seim, 2006. "An empirical model of firm entry with endogenous product‐type choices," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 619-640, September.
    41. Amit Gandhi & Luke Froeb & Steven Tschantz & Gregory J. Werden, 2008. "Post‐Merger Product Repositioning," Journal of Industrial Economics, Wiley Blackwell, vol. 56(1), pages 49-67, March.
    42. Ecchia, Giulio & Lambertini, Luca, 1997. "Minimum Quality Standards and Collusion," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 101-113, March.
    43. Eric Giraud-Héraud & Hakim Hammoudi & Mahdi Mokrane, 2003. "Multiproduct firm behaviour in a differentiated market," Canadian Journal of Economics, Canadian Economics Association, vol. 36(1), pages 41-61, February.
    44. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
    45. Gene M. Grossman & Carl Shapiro, 1988. "Foreign Counterfeiting of Status Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 79-100.
    46. Bloch, Francis, 1996. "Sequential Formation of Coalitions in Games with Externalities and Fixed Payoff Division," Games and Economic Behavior, Elsevier, vol. 14(1), pages 90-123, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bos, Iwan & Marini, Marco A. & Saulle, Riccardo D., 2020. "Cartel formation with quality differentiation," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 36-50.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2015. "Endogenous Mergers in Vertically Differentiated Markets," MPRA Paper 68318, University Library of Munich, Germany.
    2. Marco A. Marini, 2018. "Collusive agreements in vertically differentiated markets," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume II, chapter 3, pages 34-56, Edward Elgar Publishing.
    3. Jean J. Gabszewicz & Marco A. Marini & Ornella Tarola, 2015. "Alliance Formation in a Vertically Differentiated Market," DIAG Technical Reports 2015-06, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    4. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2017. "Horizontal mergers and product quality," Canadian Journal of Economics, Canadian Economics Association, vol. 50(4), pages 1063-1103, November.
    5. Bos, Iwan & Marini, Marco A. & Saulle, Riccardo D., 2020. "Cartel formation with quality differentiation," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 36-50.
    6. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2016. "Vertical Differentiation and Collusion: Cannibalization or Proliferation?," ETA: Economic Theory and Applications 232221, Fondazione Eni Enrico Mattei (FEEM).
    7. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2017. "Vertical differentiation and collusion: Pruning or proliferation?," Research in Economics, Elsevier, vol. 71(1), pages 129-139.
    8. Sergio Currarini & Marco A. Marini, 2015. "Coalitional Approaches to Collusive Agreements in Oligopoly Games," Manchester School, University of Manchester, vol. 83(3), pages 253-287, June.
    9. A. Yeşim Orhun & Sriram Venkataraman & Pradeep K. Chintagunta, 2016. "Impact of Competition on Product Decisions: Movie Choices of Exhibitors," Marketing Science, INFORMS, vol. 35(1), pages 73-92, January.
    10. Chrysovalantou Milliou & Joel Sandonis, 2018. "Manufacturer Mergers and Product Variety in Vertically Related Markets," Journal of Industry, Competition and Trade, Springer, vol. 18(1), pages 1-24, March.
    11. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, October.
    12. Cosnita-Langlais, Andreea, 2012. "Horizontal market concentration: Theoretical insights from spatial models," Research in Economics, Elsevier, vol. 66(1), pages 22-32.
    13. László Á. Kóczy, 2018. "Partition Function Form Games," Theory and Decision Library C, Springer, number 978-3-319-69841-0, December.
    14. Takeda, Kohei & Hosoe, Toyoki & Watanabe, Takayuki & Matsubayashi, Nobuo, 2018. "Stability analysis of horizontal mergers in a market with asymmetric substitutability," Mathematical Social Sciences, Elsevier, vol. 96(C), pages 73-84.
    15. Mario Pezzino, 2010. "Minimum Quality Standards with More Than Two Firms Under Cournot Competition," The IUP Journal of Managerial Economics, IUP Publications, vol. 0(3), pages 26-45, August.
    16. Marco A. Marini, 2007. "An Overview of Coalitions and Networks Formation Models for Economic Applications," Working Papers 0707, CREI Università degli Studi Roma Tre, revised 2007.
    17. Elena Argentesi & Paolo Buccirossi & Roberto Cervone & Tomaso Duso & Alessia Marrazzo, 2021. "The Effect of Mergers on Variety in Grocery Retailing," CESifo Working Paper Series 9137, CESifo.
    18. Elena Argentesi & Paolo Buccirossi & Roberto Cervone & Tomaso Duso & Alessia Marrazzo, 2018. "Price or Variety? An Evaluation of Mergers Effects in Grocery Retailing," CESifo Working Paper Series 7035, CESifo.
    19. Paz Espinosa, Maria & Macho-Stadler, Ines, 2003. "Endogenous formation of competing partnerships with moral hazard," Games and Economic Behavior, Elsevier, vol. 44(1), pages 183-194, July.
    20. Aymeric Lardon, 2019. "On the coalitional stability of monopoly power in differentiated Bertrand and Cournot oligopolies," Theory and Decision, Springer, vol. 87(4), pages 421-449, November.

    More about this item

    Keywords

    mergers; price collusion; vertically differentiated products; sequential game of coalition formation;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejtec:v:19:y:2019:i:1:p:22:n:3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://www.degruyter.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.