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Endogenous Mergers in Markets with Vertically Differentiated Products

  • Jean J. Gabszewicz , Marco A. Marini ORCID logo EMAIL logo and Ornella Tarola
Published/Copyright: May 4, 2018

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.

JEL Classification: D42; D43; L1; L12; L13; L41

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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Published Online: 2018-05-04

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