Mergers in which price and quality are set by bargaining

Abstract

Mergers of horizontal competitors may affect product quality as well as price. For example,
potential quality effects are often considered when analyzing healthcare mergers. There exists a
small theoretical literature on the effects of mergers on quality when price and quality are chosen
by a seller. In this paper, we examine mergers of sellers (e.g., healthcare providers) whose price
and quality is set via bilateral bargaining with buyers (e.g., insurers). In our model, the effect of
a competition-reducing merger on quality depends solely on whether or not the buyer’s marginal
rate of substitution of quality for price is decreasing, a concept related to quality being a normal
good.

Keywords: Mergers, Bargaining, Quality

JEL Classification: L15, L13, L40