Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 23/02: Merger, partial collusion and relocation

Pedro Posada () and Odd Rune Straume ()
Additional contact information
Pedro Posada: Department of Economics, University of Warwick, Postal: Coventry, CV4 7AL, UK.
Odd Rune Straume: University of Bergen, Department of Economica, Postal: Hermann Fossgt. 6, N-5007 Bergen, Norway

Abstract: We set up a three-firm model of spatial competition to analyse how a merger affects the incentives for relocation, and conversely, how the possibility of relocation affects the profitability of the merger, particularly for the non-participating firm. The analysis is carried out for the assumptions of both mill pricing and price discrimination, and we also consider the case of partial collusion. For the case of mill pricing, a merger will generally induce the merger participants to relocate, but the direction of relocation is ambiguous, and dependent on the degree of convexity in the consumers’ transportation cost function. We also identify a set of parameter values for which the free-rider effect of a merger vanishes, implying that the possibility of relocation could solve the ‘merger paradox’, even in the absence of price discrimination.

Keywords: Spatial competition; Merger; Relocation; Partial collusion.

JEL-codes: L13; L41; R30

24 pages, December 22, 2002

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