Endogenous Mergers in Vertically Differentiated Markets

Jean J. Gabszewicz, Marco Marini and Ornella Tarola

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies the incentives for firms competing in vertically differentiated markets to sign binding collusive agreements, as in the case of mergers and alliances. Empirical investigations show that firms involved in mergers and acquisitions revise prices and qualities as to maximize their joint profits. In a few cases merging firms are also observed shutting down some lines of activities (so called market pruning). In this paper we attempt to test these predictions by modelling a three-stage game in which, at the first stage, three firms selling goods independently in a vertically differentiated market can commit to sign either a full or a partial voluntary agreement (with a subset of firms) via a sequential game of coalition formation while, at the second and third stage they can optimally revise their qualities and prices, respectively. In such a setting we study whether some binding agreements (as full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game. Moreover, we analyse the final effects of different coalition structures on equilibrium qualities, prices and profits accruing to firms. We obtain the following results: (i) initial firms' heterogeneity appears a crucial factor for mergers to arise; (ii) although profitable, the grand coalition of firms (i.e. the whole market merger) is not the outcome of the finite-horizon negotiation, where only partial mergers arise; (iii) all stable mergers comprehends the firm producing the bottom quality good; (iv) all stable mergers reduce the number of variants on sale (market pruning); (v) stable mergers always increase the quality gap among variants. All model findings seem compatible with the existing empirical observations.

Keywords: Vertically Differentiated Markets; Mergers; Merger Policies; Cannibalization; Market Pruning; Endogenous Coalition Formation; Price Collusion; Grand Coalition; Coalition Stability; Core; Sequential Game of Coalition Formation. (search for similar items in EconPapers)
JEL-codes: D2 D4 D42 D43 L1 (search for similar items in EconPapers)
Date: 2015-12-10
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:68318

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