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Search Costs, Demand-Side Economies and the Incentives to Merge Under Bertrand Competition

64 Pages Posted: 5 Mar 2013  

José L. Moraga-González

VU University Amsterdam; University of Groningen

Vaiva Petrikaite

University of Groningen

Date Written: March 2013

Abstract

We study the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search sequentially for satisfactory deals. In the pre-merger symmetric equilibrium, consumers visit firmsrandomly. However, after a merger, because insiders raise their prices more than the outsiders, consumers start searching for good deals at the non-merging stores, and only when they do not find a satisfactory product there they visit the merging firms. As search costs go up, consumer traffic from the non-merging firms to the merged ones decreases and eventually mergers become unprofitable. This new merger paradox can be overcome if the merged entity chooses to stock each of its stores with all the products of the constituent firms, which generates sizable search economies. We show that such demand-side economies can confer the merging firms a prominent position in the marketplace, in which case their price may even be lower than the price of the non-merging firms. In that situation, consumers start searching for a satisfactory good at the merged entity and the firms outside the merger lose out. When search economies are sufficiently large, a merger is beneficial for consumers too, and overall welfare increases.

Keywords: consumer search, demand-side economies, economies of search, insiders, long-run, mergers, orders of search, outsiders, prominence, sequential search, short-run

JEL Classification: D40, D83, L13

Suggested Citation

Moraga-González, José L. and Petrikaite, Vaiva, Search Costs, Demand-Side Economies and the Incentives to Merge Under Bertrand Competition (March 2013). CEPR Discussion Paper No. DP9374. Available at SSRN: https://ssrn.com/abstract=2228553

Jose 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
Netherlands

Vaiva Petrikaite

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

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