Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 4/2014: Horizontal Mergers and Product Quality-

Kurt R. Brekke (), Luigi Siciliani () and Odd Rune Straume ()
Additional contact information
Kurt R. Brekke: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Luigi Siciliani: University of York, Postal: Centre for Health Economics, University of York, Heslington,, York YO10 5DD, UK
Odd Rune Straume: University of Minho, Postal: Department of Economics/NIPE, , University of Minho, Campus de Gualtar, 4710-057 Braga,, Portugal

Abstract: Using a spatial competition framework with three ex ante identical firms, we study the effects of a horizontal merger on quality, price and welfare. The merging firms always reduce quality. They also increase prices if demand responsiveness to quality is sufficiently low. The non-merging firm, on the other hand, always responds by increasing both quality and prices. Overall, a merger leads to higher average prices and quality in the market. The welfare implications of a merger are not clear-cut. If the demand responsiveness to quality is sufficiently high, some consumers benefit from the merger and social welfare might also increase.

Keywords: Horizontal mergers; Quality; Spatial Competition.

JEL-codes: L13; L15; L41

26 pages, February 10, 2014

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