Consumer Search Costs and the Incentives to Merge Under Bertrand Competition

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 then, if they do not find any product satisfactory enough, they continue searching 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.

Number of Pages in PDF File: 40

Keywords: mergers, search, insiders, outsiders, order of search, prominence

JEL Classification: D40, D83, L13

working papers series