Wednesday, October 10, 2018
Justin P. Johnson, Cornell University - Samuel Curtis Johnson Graduate School of Management and Andrew Rhodes, University of Toulouse 1 - Toulouse School of Economics (TSE) identify Multiproduct Mergers and Quality Competition.
ABSTRACT: We investigate mergers in markets where quality differences between products are important, there are multiproduct firms, and firms compete in quantities. Mergers without synergies may raise consumer surplus, but only when the pre-merger industry structure satisfies certain observable features. Synergies may lower consumer surplus. Mergers are more readily profitable when an industry exhibits multiple qualities, and mergers between small numbers of firms with small market shares may be profitable. We provide a new measure of industry concentration: the Quality-adjusted Herfindahl-Hirschman Index extends the standard Herfindahl-Hirschman Index to markets in which quality differences are central. We extend the analysis of external effects to a multiproduct setting, and show that some non-merging firms may benefit while others lose following a merger.