Working Paper: CEPR ID: DP7683
Authors: Rosa Branca Esteves; Helder Vasconcelos
Abstract: This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in Behaviour-Based Price Discrimination (BBPD). From a merger policy perspective, this paper's main contribution is two-fold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price-discriminate), but has no effect on the outsider firm's profitability, thereby eliminating the so called `free-riding problem'. Second, this equilibrium merger is shown to increase industry profits at the expense of consumers' surplus, leaving total welfare unaffected. This then suggests that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD.
Keywords: behavior-based price discrimination; customer poaching; horizontal mergers
JEL Codes: D43; L13; L15; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mergers (G34) | profitability of merging firms (L21) |
| mergers (G34) | profits of outsider firms (L21) |
| mergers (G34) | industry profits (D33) |
| mergers (G34) | consumer surplus (D46) |
| price discrimination (D40) | profitability of merging firms (L21) |
| mergers and price discrimination (L42) | total welfare (D69) |
| price discrimination (D40) | freeriding problem (H40) |