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Price Discrimination under Customer Recognition and Mergers

  • Esteves, Rosa Branca
  • Vasconcelos, Helder

This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in Behaviour-Based Price Discrimination (BBPD). From a merger policy perspective, this paper's main contribution is two-fold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price-discriminate), but has no effect on the outsider firm's profitability, thereby eliminating the so called `free-riding problem'. Second, this equilibrium merger is shown to increase industry profits at the expense of consumers' surplus, leaving total welfare unaffected. This then suggests that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7683.

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Date of creation: Feb 2010
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Handle: RePEc:cpr:ceprdp:7683
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  1. Rosa Branca Esteves, 2007. "Pricing with Customer Recognition," NIPE Working Papers 27/2007, NIPE - Universidade do Minho.
  2. Yongmin Chen, 2008. "DYNAMIC PRICE DISCRIMINATION WITH ASYMMETRIC FIRMS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 56(4), pages 729-751, December.
  3. Rosa Branca Esteves, 2009. "A Survey on the Economics of Behaviour-Based Price Discrimination," NIPE Working Papers 5/2009, NIPE - Universidade do Minho.
  4. James D. Reitzes & David T. Levy, 1995. "Price Discrimination and Mergers," Canadian Journal of Economics, Canadian Economics Association, vol. 28(2), pages 427-36, May.
  5. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
  6. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
  7. Vasconcelos, Helder, 2006. "Endogenous mergers in endogenous sunk cost industries," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 227-250, March.
  8. Russell Pittman, 2007. "Consumer Surplus as the Appropriate Standard for Antitrust Enforcement," EAG Discussions Papers 200709, Department of Justice, Antitrust Division.
  9. Horn, Henrik & Persson, Lars, 1996. "Endogenous Mergers in Concentrated Markets," CEPR Discussion Papers 1544, C.E.P.R. Discussion Papers.
  10. Ramon Fauli-Oller, 2000. "Takeover Waves," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(2), pages 189-210, 06.
  11. Kamien, Morton I & Zang, Israel, 1990. "The Limits of Monopolization through Acquisition," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 465-99, May.
  12. repec:cup:cbooks:9780521816632 is not listed on IDEAS
  13. Rosa Branca Esteves, 2007. "Customer Poaching and Advertising," NIPE Working Papers 12/2007, NIPE - Universidade do Minho.
  14. Taylor, Curtis R., 2000. "Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," Working Papers 00-12, Duke University, Department of Economics.
  15. Ramon Fauli-Oller, 2000. "Takeover Waves," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 189-210, 06.
  16. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  17. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
  18. repec:cup:cbooks:9780521016919 is not listed on IDEAS
  19. 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.
  20. Rothschild, R. & Heywood, John S. & Monaco, Kristen, 2000. "Spatial price discrimination and the merger paradox," Regional Science and Urban Economics, Elsevier, vol. 30(5), pages 491-506, September.
  21. Hart, Sergiu & Kurz, Mordecai, 1983. "Endogenous Formation of Coalitions," Econometrica, Econometric Society, vol. 51(4), pages 1047-64, July.
  22. Larry D. Qiu & Wen Zhou, 2007. "Merger waves: a model of endogenous mergers," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 214-226, 03.
  23. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  24. Chen, Yuxin & Zhang, Z. John, 2009. "Dynamic targeted pricing with strategic consumers," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 43-50, January.
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