Volume 22, Issue 3

Beginning with two Hotelling duopolies where demand for the product in each market is independent of demand for the product in the other, the paper examines the price, profit and welfare consequences that result when first one firm in a market merges with a firm in the other market creating a single two-product firm and then the remaining two firms merge – resulting in a duopoly of two-product firms. The paper demonstrates how to compute the equilibrium in each market structure. Assuming that firms cannot commit not to use all the pricing instruments at their disposal, mixed bundling by two-product firms emerges following each merger. While such behavior is a unilateral best response, the equilibrium consequences of these choices end up lowering total profits and welfare compared to the pre-merger markets suggesting that the opportunity to engage in mixed bundling cannot be the sole motivation for such mergers.

We study price-cap regulation in a market in which a vertically integrated upstream monopolist sells an essential input to a downstream competitor. In the absence of regulation, entry benefits both firms, but may harm downstream consumers because the upstream monopolist can set a high input price that would push downstream prices above the unregulated monopoly level. However, if a regulator caps the incumbent’s upstream and downstream prices, consumers and firms are better off after entry than under a price-cap monopoly. We extend our model to examine the concern that price caps may induce incumbents to forgo cost-reducing investments and dampen entrants’ incentives to self-provision the input.