Spatial price discrimination and mergers with convex production costs

Abstract

We examine duopolists that have convex production costs and locate under spatial price discrimination in anticipation of a merger. We show that the merger frequently results in locations that reduce social cost. This contrasts with the well-known result that with linear production costs the merger distorts locations to increase social cost. While mergers in our model can generate location asymmetry and so higher production costs, the locations frequently reduce transport cost sufficiently that the sum of transport and production costs is reduced.