Endogenous Mergers in Markets with Vertically Differentiated Products

Jean Gabszewicz, Marco Marini and Ornella Tarola

The B.E. Journal of Theoretical Economics, 2019, vol. 19, issue 1, 22

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.

Keywords: mergers; price collusion; vertically differentiated products; sequential game of coalition formation (search for similar items in EconPapers)
JEL-codes: D42 D43 L1 L12 L13 L41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Endogenous mergers in markets with vertically differentiated products (2019)
Working Paper: Endogenous Mergers in Markets with Vertically Differentiated Products (2017)
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DOI: 10.1515/bejte-2017-0001

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