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Consumer Search Costs and the Incentives to Merge Under Bertrand Competition

José L. Moraga-González

VU University Amsterdam; University of Groningen

Vaiva Petrikaite

University of Groningen

July 22, 2011

Tinbergen Institute Discussion Paper No. 11-099/1

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

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Date posted: July 25, 2011  

Suggested Citation

Moraga-González, José L. and Petrikaite, Vaiva, Consumer Search Costs and the Incentives to Merge Under Bertrand Competition (July 22, 2011). Tinbergen Institute Discussion Paper No. 11-099/1. Available at SSRN: https://ssrn.com/abstract=1892724 or http://dx.doi.org/10.2139/ssrn.1892724

Contact Information

Jose Luis Moraga-Gonzalez (Contact Author)
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
Vaiva Petrikaite
University of Groningen ( email )
P.O. Box 800
9700 AH Groningen
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