SFB 303 Discussion Paper No. A - 132

Author: Zachau, Ulrich
Title: Mergers in a Model with Vertical Product Differentiation
Abstract: In this paper, I introduce mergers into a version of the standard model of price competition with vertically differentiated products (Gabszewicz and Thisse (1979, 1980), Shaked and Sutton (1982, 1983)). I obtain the following results. Firstly, there exists a unique Nash equilibrium in the price competition game among any number of multi-product firms. Secondly, comparing the Nash equilibria for different industry structures, both the merging and the outside firms always gain by merger, but, in contrast to existing models in the literature, mergers are sometimes more profitable for the merging firms than for the outside firms. Thirdly, when the firms` merger decisions are fully endogenous, the monopoly created by a merger of all firms is the unique stable industry structure in a very strong sense.
Creation-Date: September 1987
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