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IESE Research Papers,
IESE Business School
No D/934: Consumer search costs and the incentives to merge under Bertrand Competition
Jose L. Moraga-Gonzalez () and Vaiva Petrikaite
Additional contact information
Jose L. Moraga-Gonzalez: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Vaiva Petrikaite: University of Groningen
Abstract: This paper studies the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search the market for satisfactory deals. In the pre-merger market equilibrium, all firms look alike and so the probability a firm is next in the queue consumers follow when visiting firms is equal across non-visited firms. However, after a merger, insiders raise their prices more than the outsiders, so consumers search for good deals first at the non-merging stores and only then, if they do not find any product satisfactory enough, at the merging stores. When search cost are negligible, the results of Deneckere and Davidson (1985) hold. However, as search costs increase, the merging firms receive fewer customers, so mergers become unprofitable for sufficiently large search costs. This new merger paradox is more likely the higher the number of non-merging firms.
Keywords: mergers; search; insiders; outsiders; order of search
40 pages, July 11, 2011
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DI-0934-E.pdf
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