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Product Differentiation, Cost-Reducing Mergers, and Consumer Welfare

  • George Norman
  • Lynne Pepall
  • Daniel Richards

Cost synergies are an explicitly recognized justification for a two-firm merger and empirical techniques are now widely used to assess the impact of cost-reducing mergers on prices and welfare in the postmerger market. We show that if the merger occurs in a vertically product differentiated market then the merger will lead to a reduction in product offerings that limits the usefulness of pre-merger empirical estimates. Indeed, we further show that in such markets, two-firm merges will lead to higher prices regardless of the merger’s cost-savings. We show that our results may obtain even when we allow for post-merger entry.

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File URL: http://ase.tufts.edu/econ/papers/200214.pdf
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Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0214.

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Date of creation: 2002
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Handle: RePEc:tuf:tuftec:0214
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  1. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Anderson, S. & De Palma, A. & Thisse, J-F., 1989. "Social Surplus And Profitability Under Different Spacial Pricing Policies," CORE Discussion Papers 1989010, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  4. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  5. Lynne M. Pepall, 2002. "The Simple Economics of Brand Stretching," The Journal of Business, University of Chicago Press, vol. 75(3), pages 535-552, July.
  6. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
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