Mergers under endogenous minimum quality standard: a note

In this note we introduce mergers and an endogenous minimum quality standard in a Cournot triopoly with vertically differentiated quality and fixed quality costs. As in Ecchia and Lambertini (1997) we endogenize the choice of the minimum quality standard by allowing the regulator to chose the standard that maximizes social welfare. We show that, without merg- ers, an endogenous minimum quality standard increases differentiation by reducing the minimum quality. This implies a reduction in the consumer surplus but an increase in the industry profit. When mergers are allowed, we show that merging always result in a standard duopoly because each new entity shuts down the lowest quality. Without the minimum quality standard, mergers produce a minimum quality higher than the socially optimal level. Consumer surplus and market coverage get reduced but welfare increases. Under the minimum quality standard, although merg- ers remain consumer surplus reducing and social welfare increasing, the minimum quality decreases and market coverage increases. All mergers result in a lower market share, with and without regulation.