On Mergers in Consumer Search Markets

36 Pages Posted: 21 Jul 2007

See all articles by Maarten Janssen

Maarten Janssen

University of Vienna - Faculty of Business, Economics, and Statistics

José L. Moraga-González

VU University Amsterdam; University of Groningen

Date Written: July 2007


We study mergers in a market where N firms sell a homogeneous good and consumers search sequentially to discover prices. The main motivation for such an analysis is that mergers generally affect market prices and thereby, in a search environment, the search behavior of consumers. Endogenous changes in consumer search may strengthen, or alternatively, offset the primary effects of a merger. Our main result is that the level of search costs are crucial in determining the incentives of firms to merge and the welfare implications of mergers. When search costs are relatively small, mergers turn out not to be profitable for the merging firms. If search costs are relatively high instead, a merger causes a fall in average price and this triggers search. As a result, non-shoppers who didn't find it worthwhile to search in the pre-merger situation, start searching post-merger. We show that this change in the search composition of demand makes mergers incentive-compatible for the firms and, in some cases, socially desirable.

Keywords: consumer search; mergers; price dispersion

JEL Classification: D40; D83; L13

Suggested Citation

Janssen, Maarten C. W. and Moraga-Gonzalez, Jose Luis, On Mergers in Consumer Search Markets (July 2007). Available at SSRN: https://ssrn.com/abstract=1001227 or http://dx.doi.org/10.2139/ssrn.1001227

Maarten C. W. Janssen (Contact Author)

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210

Jose Luis Moraga-Gonzalez

VU University Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam

HOME PAGE: http://www.tinbergen.nl/~moraga/

University of Groningen

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV

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