Abstract
This paper studies the incentives of firms selling vertically differentiated products to merge. To this aim, we introduce a three-stage game in which, at the first stage, three independent firms can decide to merge with their competitors via a sequential game of coalition formation and, at the second and third stage, they can optimally revise their qualities and prices, respectively. We study whether such binding agreements (i.e. full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game, and analyze their effects on equilibrium qualities, prices and profits. We find that, although profitable, the merger-to-monopoly of all firms is not an outcome of the finite-horizon negotiation, where only partial mergers arise. Moreover, we show that all stable mergers always include the firm initially producing the bottom quality good and reduce the number of variants on sale.
Acknowledgements:
We are very grateful for valuable comments and suggestions to Luca Benvenuti, Sergio Currarini, Alberto De Santis, Michael Kopel, Giorgio Rodano, one editor of this journal, three anonymous referees and the participants of the seminars at the University of Milan, Universidad Carlos III de Madrid, Nova Universidade de Lisboa, University of Rome La Sapienza, Paris Dauphine, and University of Glasgow. The second author acknowledges financial support from the Italian Ministry of Education, University and Research and CIRIEC International, Liége, Belgium.
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Articles in the same Issue
- Articles
- Privatizing Multi-subsidiary Public Firm in Location Model
- Efficient Combinatorial Allocations: Individual Rationality versus Stability
- On Decay Centrality
- Sequential Auctions with Decreasing Reserve Prices
- The core of a strategic game
- Targeted Advertising on Competing Platforms
- Representation in Multi-Issue Delegated Bargaining
- Endogenous Mergers in Markets with Vertically Differentiated Products
- Standards of Proof and Civil Litigation: A Game-Theoretic Analysis
- Retained Earnings, Interest Rates and Lending Relationship
- Uniform Price Auctions with Asymmetric Bidders
- Conformity and Influence
- Sellouts, Beliefs, and Bandwagon Behavior
- Notes
- Eco-Firms and the Sequential Adoption of Environmental Corporate Social Responsibility in the Managerial Delegation
- Vertical Contract and Competition Intensity in Hotelling’s Model
- Constrained Allocation of Projects to Heterogeneous Workers with Preferences over Peers
- Irrelevance of the Strategic Variable in the Case of Relative Performance Maximization
- Critical Efficiencies as Upward Pricing Pressure with Feedback Effects
- On the Openness of Unique Pure-Strategy Nash Equilibrium
- Forecast Dispersion in Finite-Player Forecasting Games
Articles in the same Issue
- Articles
- Privatizing Multi-subsidiary Public Firm in Location Model
- Efficient Combinatorial Allocations: Individual Rationality versus Stability
- On Decay Centrality
- Sequential Auctions with Decreasing Reserve Prices
- The core of a strategic game
- Targeted Advertising on Competing Platforms
- Representation in Multi-Issue Delegated Bargaining
- Endogenous Mergers in Markets with Vertically Differentiated Products
- Standards of Proof and Civil Litigation: A Game-Theoretic Analysis
- Retained Earnings, Interest Rates and Lending Relationship
- Uniform Price Auctions with Asymmetric Bidders
- Conformity and Influence
- Sellouts, Beliefs, and Bandwagon Behavior
- Notes
- Eco-Firms and the Sequential Adoption of Environmental Corporate Social Responsibility in the Managerial Delegation
- Vertical Contract and Competition Intensity in Hotelling’s Model
- Constrained Allocation of Projects to Heterogeneous Workers with Preferences over Peers
- Irrelevance of the Strategic Variable in the Case of Relative Performance Maximization
- Critical Efficiencies as Upward Pricing Pressure with Feedback Effects
- On the Openness of Unique Pure-Strategy Nash Equilibrium
- Forecast Dispersion in Finite-Player Forecasting Games