The Price and Variety Effects of Horizontal Mergers

Abstract

We consider a general industry model with an arbitrary number of competitors, each offering a subset of a given line of products. The products are procured from a set of suppliers, and each product is differentiated by the supplier it is sourced from and the retailer it is sold at. The retailers engage in price competition for their entire product assortment. Our paper addresses the effects on prices, profits, and product variety due to horizontal mergers of some or all of the retailers. In the case of a full merger of all retailers, we prove that all prices and firm profits increase while the product variety decreases. Under a partial merger, we show that prices and firm profits continue to increase, but product variety may change in various ways. In the latter case, we provide easily verified sufficient conditions for an expansion of the product variety.