Multiproduct Mergers and Quality Competition
41 Pages Posted: 23 Sep 2018 Last revised: 16 Jan 2019
Date Written: January 15, 2019
We investigate mergers in markets where quality differences between products are central. In our model, firms endogenously choose qualities, may sell multiple products, and may reposition their product lines by adding or removing products of different qualities following a merger. We find that such mergers are materially different from those studied in the existing literature. Mergers without synergies may exhibit a "product-mix effect" which raises consumer surplus, but only when the pre-merger industry structure satisfies certain observable features. Synergies may lower consumer surplus. Mergers are more readily profitable when an industry exhibits multiple qualities, and mergers between small numbers of firms with small market shares may be profitable. Some non-merging firms may benefit while others lose following a merger. We also provide a new measure of industry concentration: the Quality-adjusted Herfindahl-Hirschman Index extends the standard Herfindahl-Hirschman Index to markets in which quality differences are central.
Keywords: Merger, multiproduct firm, synergy
JEL Classification: K2, L4
Suggested Citation: Suggested Citation