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Mergers in Imperfectly Segmented Markets

Author

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  • Pio Baake
  • Christian Wey

Abstract

We present a model with firms selling (homogeneous) products in two imperfectly segmented markets (a "high-demand" and a "low-demand" market). Buyers are mobile but restricted by transportation costs, so that imperfect arbitrage occurs when prices differ in both markets. We show that equilibria are distorted away from Cournot outcomes to prevent consumer arbitrage. Furthermore, a merger can lead to an equilibrium in which only the "high-demand" market is served. This is more likely (i) the lower consumers' transportation costs and (ii) the higher the concentration of the industry. Therefore, merger incentives are much larger than standard analysis suggests.

Suggested Citation

  • Pio Baake & Christian Wey, 2009. "Mergers in Imperfectly Segmented Markets," Discussion Papers of DIW Berlin 919, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp919
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.338490.de/dp919.pdf
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    Keywords

    Imperfect Market Segmentation; Oligopoly; Price Discrimination; Consumer Arbitrage; Mergers;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • 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

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