DP7683 Price Discrimination under Customer Recognition and Mergers

Author(s): Rosa Branca Esteves, Helder Vasconcelos
Publication Date: February 2010
Keyword(s): Behaviour-Based Price Discrimination, Customer Poaching, Horizontal Mergers
JEL(s): D43, L13, L15, L41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7683

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.