Abstract

http://ssrn.com/abstract=2405203
 
 

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Newsvendor Mergers


Soo-Haeng Cho


Carnegie Mellon University - Tepper School of Business

Xin Wang


Carnegie Mellon University

March 5, 2014


Abstract:     
This paper examines the effects of a merger between price-setting newsvendors on firms' prices, inventories and expected profits in an oligopolistic market. It is well-known that inventory pooling can greatly reduce inventory costs in a centralized distribution system because it helps reduce aggregate demand uncertainty. While such statistical economies of scale are important benefits of a retail merger, the extant literature models cost savings from a merger only through reduction in a post-merger firm's marginal cost. In this paper, we develop a model of a retail merger under uncertain demand that distinguishes between cost savings from conventional economies of scale and those from statistical economies of scale, and we show that these two sources of cost savings have substantially different impacts on firms' decisions in a post-merger market. Contrary to the existing theory of mergers developed under deterministic demand, we find that cost savings from inventory pooling always cause prices to rise, and that marginal cost reduction induces firms to lower their prices only when it is substantial. Furthermore, a merger tends to be less harmful to consumers in the industries that are more susceptible to business cycles (which may exhibit higher correlation among firms' uncertain demands and create lower pooling benefits). Our results bear important implications for antitrust policies, for it is commonly believed that cost savings from a merger will be passed on to consumers.

Number of Pages in PDF File: 47

Keywords: Price competition, demand uncertainty, horizontal merger, inventory pooling

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Date posted: March 7, 2014 ; Last revised: March 8, 2014

Suggested Citation

Cho, Soo-Haeng and Wang, Xin, Newsvendor Mergers (March 5, 2014). Available at SSRN: http://ssrn.com/abstract=2405203 or http://dx.doi.org/10.2139/ssrn.2405203

Contact Information

Soo-Haeng Cho (Contact Author)
Carnegie Mellon University - Tepper School of Business ( email )
Pittsburgh, PA 15213-3890
United States
HOME PAGE: http://public.tepper.cmu.edu/facultydirectory/FacultyDirectoryProfile.aspx?id=290
Xin Wang
Carnegie Mellon University ( email )
Pittsburgh, PA 15213-3890
United States
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