Horizontal mergers between public and private firms in vertically-differentiated markets

Abstract

This paper studies the impact of mergers between public and private firms in vertically-differentiated markets on product repositioning, consumer surplus, and social welfare. We analyze a game-theoretical model with a public and two private firms in which the public firm (private firms) aim to maximize social welfare (profits). We examine four merger scenarios: the merger of two private firms forming a new private firm to produce either one or two products, denoted by scenarios S1 and S2, respectively, competing with a public firm; and the merger of a public firm and one private firm forming a new public firm to produce either one or two products, denoted by scenarios C1 and C2, respectively, competing with the other private firm. Our findings suggest that when the cost reduction for the merger focusing on single-product production is low, scenario C2, where the new public firm produces two products with the highest and lowest quality levels, leads to the highest social welfare and consumer surplus. Conversely, in scenario C1, where the new public firm produces one product with the highest quality level, the largest social welfare and consumer surplus are observed.