Information Markets, Product Markets and Vertical Merger

Abstract

In many markets, firms have the option of advertising at price comparison sites to broaden their market reach. Such sites are often controlled by profit-maximizing "information gatekeepers" charging advertising fees. This paper considers vertical merger between such a monopoly information gatekeeper and a firm in the product market. We find that: (i) If the integrated firm can act as a price leader before independent firms make advertising and pricing decisions, then the merger is profitable. (ii) If the integrated firm cannot move first, then the merger is unprofitable, or divestiture is optimal in the case where the firm has already created the gatekeeper. As a result, the merged entity has an incentive to invest in technologies to support a price leader.

Keywords: Information Gatekeeper, Vertical Merger, Price Leader

JEL Classification: D43, L13, L40