Search Costs, Demand-Side Economies and the Incentives to Merge under Bertrand Competition
We study the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search sequentially for satisfactory deals. In the pre-merger symmetric equilibrium, consumers visit firmsrandomly. However, after a merger, because insiders raise their prices more than the outsiders, consumers start searching for good deals at the non-merging stores, and only when they do not find a satisfactory product there they visit the merging firms. As search costs go up, consumer traffic from the non-merging firms to the merged ones decreases and eventually mergers become unprofitable. This new merger paradox can be overcome if the merged entity chooses to stock each of its stores with all the products of the constituent firms, which generates sizable search economies. We show that such demand-side economies can confer the merging firms a prominent position in the marketplace, in which case their price may even be lower than the price of the non-merging firms. In that situation, consumers start searching for a satisfactory good at the merged entity and the firms outside the merger lose out. When search economies are sufficiently large, a merger is beneficial for consumers too, and overall welfare increases.
|Date of creation:||Mar 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Norbert Schulz & Konrad Stahl, 1996. "Do Consumers Search for the Highest Price? Oligopoly Equilibrium and Monopoly Optimum in Differentiated Products Markets," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 542-562, Autumn.
- Simon P. Anderson & Regis Renault, 1999.
"Pricing, product diversity, and search costs: a Bertrand-Chamberlin-Diamond model,"
Virginia Economics Online Papers
335, University of Virginia, Department of Economics.
- Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter.
- Anderson, S.P. & Renault, R., 1997. "Pricing, Product Diversity and Search Costs: A Bertrand-Chamberlin-Diamond Model," Papers 97.481, Toulouse - GREMAQ.
- Shelegia, Sandro, 2012. "Multiproduct pricing in oligopoly," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 231-242.
- Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
- Maria Arbatskaya, 2007. "Ordered search," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 119-126, 03.
- Marco A. Haan & José L. Moraga‐González, 2011.
"Advertising for Attention in a Consumer Search Model,"
Royal Economic Society, vol. 121(552), pages 552-579, 05.
- Haan, Marco A. & Moraga-Gonzalez, Jose L., 2009. "Advertising for attention in a consumer search model," IESE Research Papers D/794, IESE Business School.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:9374. 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: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.