Search Costs, Demand-Side Economies and the Incentives to Merge under Bertrand Competition

Moraga-González, José-Luis and Vaiva Petrikaite
Authors registered in the RePEc Author Service: Jose Luis Moraga-Gonzalez

No 9374, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search sequentially for satisfactory deals. In the pre-merger symmetric equilibrium, consumers visit firmsrandomly. However, after a merger, because insiders raise their prices more than the outsiders, consumers start searching for good deals at the non-merging stores, and only when they do not find a satisfactory product there they visit the merging firms. As search costs go up, consumer traffic from the non-merging firms to the merged ones decreases and eventually mergers become unprofitable. This new merger paradox can be overcome if the merged entity chooses to stock each of its stores with all the products of the constituent firms, which generates sizable search economies. We show that such demand-side economies can confer the merging firms a prominent position in the marketplace, in which case their price may even be lower than the price of the non-merging firms. In that situation, consumers start searching for a satisfactory good at the merged entity and the firms outside the merger lose out. When search economies are sufficiently large, a merger is beneficial for consumers too, and overall welfare increases.

Keywords: Mergers; Insiders; Outsiders; Short-run; Long-run; Consumer search; Demand-side economies; Economies of search; Orders of search; Sequential search (search for similar items in EconPapers)
JEL-codes: D40 D83 L13 (search for similar items in EconPapers)
Date: 2013-03
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Journal Article: Search costs, demand-side economies, and the incentives to merge under Bertrand competition (2013)
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