Endogenous mergers under multi-market competition

Tina Kao, Flavio Menezes*

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    6 Citations (Scopus)

    Abstract

    This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play out. The first is the selection effect, which acts to increase welfare, as shutting down the relatively more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works to increase prices and, therefore, decrease consumer surplus (but increase producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.

    Original languageEnglish
    Pages (from-to)817-829
    Number of pages13
    JournalJournal of Mathematical Economics
    Volume45
    Issue number12
    DOIs
    Publication statusPublished - 20 Dec 2009

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