Consumer Search Costs and the Incentives to Merge Under Bertrand Competition

40 Pages Posted: 22 Oct 2011

See all articles by José L. Moraga-González

José L. Moraga-González

VU University Amsterdam; University of Groningen

Vaiva Petrikaite

University of Groningen

Multiple version iconThere are 2 versions of this paper

Date Written: July 21, 2011

Abstract

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 only then, if they do not find any product satisfactory enough, 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.

Keywords: mergers, search, insiders, outsiders, order of search

JEL Classification: D40, D83, L13

Suggested Citation

Moraga-Gonzalez, Jose Luis and Petrikaite, Vaiva, Consumer Search Costs and the Incentives to Merge Under Bertrand Competition (July 21, 2011). IESE Business School Working Paper No. 934, Available at SSRN: https://ssrn.com/abstract=1947276

Jose Luis Moraga-Gonzalez (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

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

University of Groningen

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

Vaiva Petrikaite

University of Groningen ( email )

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

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