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Endogenous Mergers in Markets with Vertically Differentiated Products

Author

Listed:
  • Gabszewicz Jean J.

    (CORE Université Catholique de Louvain, Louvain-la-Neuve, Belgium)

  • Marini Marco A.

    (Department of Social and Economic Sciences, University of Rome La Sapienza, Piazzale Aldo Moro, 5,00185Rome, Italy)

  • Tarola Ornella

    (Department of Social and Economic Sciences, University of Rome La Sapienza, Piazzale Aldo Moro, 5,00185Rome, Italy)

Abstract

This paper studies the incentives of firms selling vertically differentiated products to merge. To this aim, we introduce a three-stage game in which, at the first stage, three independent firms can decide to merge with their competitors via a sequential game of coalition formation and, at the second and third stage, they can optimally revise their qualities and prices, respectively. We study whether such binding agreements (i.e. full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game, and analyze their effects on equilibrium qualities, prices and profits. We find that, although profitable, the merger-to-monopoly of all firms is not an outcome of the finite-horizon negotiation, where only partial mergers arise. Moreover, we show that all stable mergers always include the firm initially producing the bottom quality good and reduce the number of variants on sale.

Suggested Citation

  • Gabszewicz Jean J. & Marini Marco A. & Tarola Ornella, 2019. "Endogenous Mergers in Markets with Vertically Differentiated Products," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(1), pages 1-22, January.
    • Handle: RePEc:bpj:bejtec:v:19:y:2019:i:1:p:22:n:3
    DOI: 10.1515/bejte-2017-0001
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    Cited by:

    1. Bos, Iwan & Marini, Marco A. & Saulle, Riccardo D., 2020. "Cartel formation with quality differentiation," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 36-50.
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    More about this item

    Keywords

    mergers; price collusion; vertically differentiated products; sequential game of coalition formation;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • 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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