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Information Markets, Product Markets and Vertical Merger

33 Pages Posted: 31 May 2007 Last revised: 22 Dec 2010

Jihui Chen

Illinois State University

Qihong Liu

University of Oklahoma - Department of Economics

Date Written: September 30, 2010

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

Suggested Citation

Chen, Jihui and Liu, Qihong, Information Markets, Product Markets and Vertical Merger (September 30, 2010). Journal of Economics and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=989826

Jihui Chen

Illinois State University ( email )

Campus Box 4200
Economics Department
Normal, IL 61790-4200
United States

HOME PAGE: http://https://about.illinoisstate.edu/jchen4/pages/default.aspx

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

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