Mergers in Imperfectly Segmented Markets

Posted by D. Daniel Sokol

Pio Baake and Christian Wey (both Deutsches Institut für Wirtschaftsforschung (DIW) Berlin and Technische Universität Berlin) investigate Mergers in Imperfectly Segmented Markets.

ABSTRACT: We present a model with firms selling (homogeneous) products in two imperfectly segmented markets (a "high-demand" and a "low-demand" market). Buyers are mobile but restricted by transportation costs, so that imperfect arbitrage occurs when prices differ in both markets. We show that equilibria are distorted away from Cournot outcomes to prevent consumer arbitrage. Furthermore, a merger can lead to an equilibrium in which only the "high-demand" market is served. This is more likely (i) the lower consumers' transportation costs and (ii) the higher the concentration of the industry. Therefore, merger incentives are much larger than standard analysis suggests.