Discussion Paper Details

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Title: Price Discrimination under Customer Recognition and Mergers

Author(s): Rosa Branca Esteves and Helder Vasconcelos

Publication Date: February 2010

Keyword(s): Behaviour-Based Price Discrimination, Customer Poaching and Horizontal Mergers

Programme Area(s): Industrial Organization

Abstract: This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in Behaviour-Based Price Discrimination (BBPD). From a merger policy perspective, this paper's main contribution is two-fold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price-discriminate), but has no effect on the outsider firm's profitability, thereby eliminating the so called `free-riding problem'. Second, this equilibrium merger is shown to increase industry profits at the expense of consumers' surplus, leaving total welfare unaffected. This then suggests that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD.

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Bibliographic Reference

Esteves, R and Vasconcelos, H. 2010. 'Price Discrimination under Customer Recognition and Mergers'. London, Centre for Economic Policy Research.