Post-Merger Product Repositioning

Abstract

We study mergers among firms that compete by simultaneously choosing price and location. The merged firm moves its two products away from each other to reduce cannibalization, and the non-merging firms move their products in between the merging firm's products. Post-merger repositioning increases product variety, which benefits consumers, but repositioning also affects post-merger prices in two ways: There is upward pressure on price as products spread out, but the merged firm's incentive to raise prices is reduced as its products are moved away from each other. Either effect can dominate, although the latter is likely to be the more important. We use a novel technique known as the stochastic response dynamic to find equilibria, which does not require the computation of first-order conditions.

Keywords: antitrust, game theory, economic modeling