The Coordinated Effects of Mergers in Differentiated Products Markets

Abstract

The Paper addresses the issue of coordinated effects of mergers in the framework of a differentiated products model. Firms' assets are product varieties that can be sold individually or entirely transferred to another firm in a merger. We show that, under symmetric optimal punishment schemes, the highest feasible collusive price declines from any asset transfer to the largest firm as long as the size of the smallest firm is unchanged. In contrast, for fully optimal punishment schemes the prices of firms that get larger increase and those of firms that get smaller decrease. In all cases, however, mergers are unprofitable unless the length of product lines is very asymmetric. We discuss the implications of the analysis for merger policy.

Keywords: Collusion, product lines, mergers, coordinated effects, joint dominance

JEL Classification: D43, K21, L13, L41