Duopoly, Delivered Pricing and Horizontal Mergers

Abstract

Federal merger guidelines recognize that when sellers are spatially dispersed, the closeness of competitors can be crucial in evaluating the welfare consequences of a merger.1 This recognition makes it surprising that more research has not focused on the issue of horizontal mergers in spatial models. The spatial setting is particularly interesting since the fact that a merger might occur in the future can alter the location decision made by firms. We analyze a spatial duopoly with price discrimination. In the first stage, firms choose locations noncooperatively, along a linear market, with the foresight that a merger may occur in a later stage. In the second stage, firms decide whether to merge. Delivered price schedules are announced in stage three. Within this structure, we study the effects of simultaneous and sequential entry and conclude that the possibility of merger generally leads to inefficient location choices and higher transport costs. Levy and Reitzes examine the anticompetitive effects of mergers in Salop's circular model [9; 12]. In this model firms are evenly spread around a circle and then a Bertrand-Nash game is played in prices. They conclude that if two adjoining firms merge, the merged firm will increase prices at both its locations and prices will rise, although to a lesser extent, at all other locations. In related work, McAfee, Simons and Williams study a Cournot-Nash model of horizontal mergers between firms that engage in spatial price discrimination [10]. Their work also yields an estimate of the increases in equilibrium post-merger delivered price. Yet, both of these studies treat firm locations as fixed. This rules out any influence of future possible merger on the location choices of firms. We will show that this influence can be substantial.