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Search Costs, Demand-Side Economies and the Incentives to merge under Bertrand Competition

Author

Listed:
  • Jose L. Moraga-Gonzalez

    (VU University Amsterdam)

  • Vaiva Petrikaite

    (University of Groningen)

Abstract
This discussion paper led to a publication in 'The RAND Journal of Economics' , Volume 44, Issue 3, pages 391–424, Fall 2013. It studies the incentives to merge in a Bertrand competition model where firms sell differentiatedproducts and consumers search for satisfactory deals. In the pre-merger symmetricequilibrium, the probability that a firm is the next one to be visited by a consumer is equal acrossfirms not yet visited. However, in the short-run after a merger, because insiders raise their pricesmore than what the outsiders do, consumers start searching for good deals at the non-mergingstores. Only when they do not find any product satisfactory enough, they continue searching atthe merging stores. When search costs are sufficiently large, consumer traffic from the non-merging firms to the merged ones is so small that mergers become unprofitable. This new merger paradox,which is more likely the higher the number of non-merging firms, can be overcome in the mediumtolong-run if the merging firms choose to stock their shelves with all the products of the constituent firms, which generates sizable search economies. Such demand-side economies can conferthe merging firms a prominent position in the marketplace, in which case their price may even belower than the price of the outsiders. In that case, consumers visit first the merged entity andthe firms outside the merger lose out. Search cost economies may render a merger beneficial forconsumers and so overall welfare may increase.

Suggested Citation

  • Jose L. Moraga-Gonzalez & Vaiva Petrikaite, 2012. "Search Costs, Demand-Side Economies and the Incentives to merge under Bertrand Competition," Tinbergen Institute Discussion Papers 12-017/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20120017
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mark Armstrong, 2017. "Ordered Consumer Search," Journal of the European Economic Association, European Economic Association, vol. 15(5), pages 989-1024.
    2. Bertin Martens & Luis Aguiar & Estrella Gomez Herrera & Frank Muller, 2018. "The digital transformation of news media and the rise of disinformation and fake news," JRC Working Papers on Digital Economy 2018-02, Joint Research Centre.
    3. Grégory Jolivet & Hélène Turon, 2019. "Consumer Search Costs and Preferences on the Internet," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(3), pages 1258-1300.
    4. Andrew Rhodes & Jidong Zhou, 2019. "Consumer Search and Retail Market Structure," Management Science, INFORMS, vol. 67(6), pages 2607-2623, June.
    5. Parakhonyak, Alexei & Titova, Maria, 2018. "Shopping malls, platforms and consumer search," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 183-213.
    6. José Luis Moraga-González & Zsolt Sándor & Matthijs R. Wildenbeest, 2017. "Prices and heterogeneous search costs," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 125-146, March.
    7. Marcel Preuss, 2023. "Search, learning, and tracking," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 54-82, March.
    8. Hong Zhu & Qi Zhu, 2016. "Mergers and acquisitions by Chinese firms: A review and comparison with other mergers and acquisitions research in the leading journals," Asia Pacific Journal of Management, Springer, vol. 33(4), pages 1107-1149, December.
    9. Amedeo Piolatto, 2015. "Online booking and information: competition and welfare consequences of review aggregators," Working Papers 2015/11, Institut d'Economia de Barcelona (IEB).
    10. Brett Hollenbeck & Renato Zaterka Giroldo, 2022. "Winning Big: Scale and Success in Retail Entrepreneurship," Marketing Science, INFORMS, vol. 41(2), pages 271-293, March.
    11. Makoto Hanazono & Noritaka Kudoh, 2024. "Prominence And Market Power: Asymmetric Oligopoly With Sequential Consumer Search," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1249-1281, August.
    12. José L. Moraga-González & Yajie Sun, 2023. "Product Quality and Consumer Search," American Economic Journal: Microeconomics, American Economic Association, vol. 15(1), pages 117-141, February.
    13. Hui Song, 2017. "Ordered search with asymmetric product design," Journal of Economics, Springer, vol. 121(2), pages 105-132, June.
    14. Estrella Gomez-Herrera & Bertin Martens & Frank Muller-Langer, 2017. "Trade, competition and welfare in global online labour markets: A "gig economy" case study," JRC Working Papers on Digital Economy 2017-05, Joint Research Centre.

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    More about this item

    Keywords

    mergers; insiders; outsiders; short-run; long-run; consumer search; demand-side economies; economies of search; order of search; sequential 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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