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Multiproduct Mergers and Quality Competition

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  • Johnson, Justin Pappas
  • Rhodes, Andrew

Abstract

We investigate mergers in markets where quality differences between products are central. In our model, firms may sell multiple products, and merging and non-merging firms may reposition their product lines by adding or removing products following a merger. We find that such mergers are materially different from those studied in the existing literature. Mergers without synergies may raise consumer surplus, but only when the pre-merger industry structure satisfies certain observable features. Synergies may lower consumer surplus. Mergers are more readily profitable when an industry exhibits multiple qualities, and mergers between small numbers of firms with small market shares may be profitable. Some nonmerging firms may benefit while others lose following a merger. We also provide a new measure of industry concentration: the Quality-adjusted Herfindahl-Hirschman Index extends the standard Herfindahl-Hirschman Index to markets in which quality differences are central.

Suggested Citation

  • Johnson, Justin Pappas & Rhodes, Andrew, 2018. "Multiproduct Mergers and Quality Competition," TSE Working Papers 18-967, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:33104
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    References listed on IDEAS

    as
    1. Nocke, Volker & Schutz, Nicolas, 2018. "An Aggregative Games Approach to Merger Analysis in Multiproduct-Firm Oligopoly," CEPR Discussion Papers 12905, C.E.P.R. Discussion Papers.
    2. Massimo Motta & Emanuele Tarantino, 2017. "The effect of horizontal mergers, when firms compete in prices and investments," Economics Working Papers 1579, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Federico, Giulio & Langus, Gregor & Valletti, Tommaso, 2018. "Horizontal mergers and product innovation," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 1-23.
    4. Rhodes, Andrew & Zhou, Jidong, 2016. "Consumer Search and Retail Market Structure," MPRA Paper 69484, University Library of Munich, Germany.
    5. Andrew Rhodes, 2015. "Multiproduct Retailing," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 360-390.
    6. Massimo Motta & Emanuele Tarantino, 2018. "The Effect of Horizontal Mergers, When Firms compete in Prices and Investments," CRC TR 224 Discussion Paper Series crctr224_056_2018, University of Bonn and University of Mannheim, Germany.
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