Mergers in Imperfectly Segmented Markets

Pio Baake and Christian Wey

No 919, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We present a model with firms selling (homogeneous) products in two imperfectly segmented markets (a "high-demand" and a "low-demand" market). Buyers are mobile but restricted by transportation costs, so that imperfect arbitrage occurs when prices differ in both markets. We show that equilibria are distorted away from Cournot outcomes to prevent consumer arbitrage. Furthermore, a merger can lead to an equilibrium in which only the "high-demand" market is served. This is more likely (i) the lower consumers' transportation costs and (ii) the higher the concentration of the industry. Therefore, merger incentives are much larger than standard analysis suggests.

Keywords: Imperfect Market Segmentation; Oligopoly; Price Discrimination; Consumer Arbitrage; Mergers (search for similar items in EconPapers)
JEL-codes: D43 L13 L41 (search for similar items in EconPapers)
Pages: 35 p.
Date: 2009
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