Working paper

Multiproduct Mergers and Quality Competition

Justin Pappas Johnson, and Andrew Rhodes

Abstract

We investigate mergers in markets where quality differences between products are central. In our model, firms may sell multiple products, and merging and non-merging firms may reposition their product lines by adding or removing products following a merger. We find that such mergers are materially different from those studied in the existing literature. Mergers without synergies may raise consumer surplus, but only when the pre-merger industry structure satisfies certain observable features. Synergies may lower consumer surplus. Mergers are more readily profitable when an industry exhibits multiple qualities, and mergers between small numbers of firms with small market shares may be profitable. Some nonmerging firms may benefit while others lose following a merger. We also provide a new measure of industry concentration: the Quality-adjusted Herfindahl-Hirschman Index extends the standard Herfindahl-Hirschman Index to markets in which quality differences are central.

Reference

Justin Pappas Johnson, and Andrew Rhodes, Multiproduct Mergers and Quality Competition, TSE Working Paper, n. 18-967, November 2018.

See also

Published in

TSE Working Paper, n. 18-967, November 2018