Post-Merger Product Repositioning

Abstract

This paper analyzes the effects of mergers between firms competing by simultaneously choosing price and location. Products combined by a merger are repositioned away from each other to reduce cannibalization, and non-merging substitutes are, in response, repositioned between the merged products. This repositioning greatly reduces the merged firm's incentive to raise prices and thus substantially mitigates the anticompetitive effects of the merger. Computation of, and selection among, equilibria is done with a novel technique known as the stochastic response dynamic, which does not require the computation of first-order conditions.