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Consumer Search Costs and the Incentives to merge under Bertrand Competition

Author

Listed:
  • Jose Luis Moraga-Gonzalez

    (University of Groningen, ICREA, IESE)

  • Vaiva Petrikaite

    (University of Groningen)

Abstract

See also the article Search Costs, Demand-side Economies, and the Incentives to merge under Bertrand Competition in the 'Rand Journal of Economics'(2013). Volume 44, issue 3, pages 391-424. This paper studies the incentives to merge in a Bertrand competitionmodel where firms sell differentiated products and consumers search the marketfor satisfactory deals. In the pre-merger market equilibrium, all firms lookalike and so the probability a firm is next in the queue consumers follow whenvisiting firms is equal across non-visited firms. However, after a merger,insiders raise their prices more than the outsiders so consumers search forgood deals first at the non-merging stores and then, if they do not find anyproduct satisfactory enough, they continue searching at the merging stores.When search cost are negligible, the results of Deneckere and Davidson (1985)hold. However, as search costs increase, the merging firms receive fewercustomers so mergers become unprofitable for sufficiently large search costs.This new merger paradox is more likely the higher the number of non-mergingfirms.

Suggested Citation

  • Jose Luis Moraga-Gonzalez & Vaiva Petrikaite, 2011. "Consumer Search Costs and the Incentives to merge under Bertrand Competition," Tinbergen Institute Discussion Papers 11-099/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20110099
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    References listed on IDEAS

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    1. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Prominence and consumer search," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 209-233, June.
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    5. Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter.
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    More about this item

    Keywords

    mergers; search; insiders; outsiders; order of search; prominence;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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