Working Paper: CEPR ID: DP10156
Authors: Kurt Richard Brekke; Luigi Siciliani; Odd Rune Straume
Abstract: Using a spatial competition framework with three ex ante identical firms, we study the effects of a horizontal merger on quality, price and welfare. The merging firms always reduce quality. They also increase prices if demand responsiveness to quality is sufficiently low. The non-merging firm, on the other hand, always responds by increasing both quality and prices. Overall, a merger leads to higher average prices and quality in the market. The welfare implications of a merger are not clear-cut. If the demand responsiveness to quality is sufficiently high, some consumers benefit from the merger and social welfare might also increase.
Keywords: horizontal mergers; quality; spatial competition
JEL Codes: L13; L15; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| merging firms (G34) | quality (L15) |
| nonmerging firm (L29) | quality (L15) |
| merging firms (G34) | prices (P22) |
| demand responsiveness to quality is low (L15) | merging firms increase prices (L11) |
| high demand responsiveness (J23) | prices (P22) |
| merger (G34) | average quality in the market (L15) |
| merging firms quality reduction (L15) | nonmerging firm quality increase (L15) |
| plant or product closure in mergers (L14) | higher quality for all firms (L15) |
| plant or product closure in mergers (L14) | higher prices for all firms (L11) |