A Merger Paradox: Proposal Right and Price Discrimination

Abstract

This article studies merger incentives in a two-sided Bertrand oligopoly market. Either buyers or sellers receive a proposal right with a probability proportional to their relative bargaining powers. Each buyer or seller, if chosen, offers a payment schedule, or contract, to every opponent. We show that if there is a separable efficient allocation, the post-merger contracts exhibit a higher level of price discrimination than the pre-merger contracts. Thus, the horizontal merger to monopoly is harmful if their bargaining power is weak enough, i.e. the merger of buyers (sellers) decreases their joint profit if buyers (sellers) are responders with a high probability. The proposal right in vertical bargaining determines the horizontal merger incentive through price discrimination. We further show that this merger paradox is likely to emerge when goods are substitutes.