DP10156 Horizontal Mergers and Product Quality

Author(s): Kurt Richard Brekke, Luigi Siciliani, Odd Rune Straume
Publication Date: September 2014
Keyword(s): horizontal mergers, quality, spatial competition
JEL(s): L13, L15, L41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10156

Using a spatial competition framework with three ex ante identical firms, we study the effects of a horizontal merger on quality, price and welfare. The merging firms always reduce quality. They also increase prices if demand responsiveness to quality is sufficiently low. The non-merging firm, on the other hand, always responds by increasing both quality and prices. Overall, a merger leads to higher average prices and quality in the market. The welfare implications of a merger are not clear-cut. If the demand responsiveness to quality is sufficiently high, some consumers benefit from the merger and social welfare might also increase.