Endogenous Mergers under Multi-Market Competition

Tina Kao and Flavio Menezes
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Tina Kao: Australian National University

No 355, Discussion Papers Series from University of Queensland, School of Economics

Abstract: This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play themselves out. The first is the selection effect, which works towards increasing welfare as shutting down the more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works towards increasing prices and, therefore, decreasing consumer surplus (but increasing producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.

Date: 2008
New Economics Papers: this item is included in nep-com and nep-mic
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https://economics.uq.edu.au/files/44497/355.pdf (application/pdf)

Related works:
Journal Article: Endogenous mergers under multi-market competition (2009)
Working Paper: Endogenous Mergers Under Multi-Market Competition (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:355

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