Spatial competition and merging incentives when firms produce complements

• Published in: Regional science and urban economics Vol. 42; no. 1; pp. 221 - 229
• Main Author: Borla, Stefania
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 2012; Elsevier Sequoia S.A
• Subjects: Acquisitions & mergers; Competition; Complementarities; Economic concentration; Economic incentives; Economic models; Externalities; Externality; Merger incentives; Mergers; Regulation; Spatial competition; Spatial models; Studies; L40; L10; Spatial competition; Merger incentives; Complementarities
• ISSN: 0166-0462; 1879-2308
• DOI: 10.1016/j.regsciurbeco.2011.09.002

In a model of spatial competition, we show that complementarities can benefit the parties to a merger more than any outsiders thus leading to higher concentration. The driving force is the negative demand externality imposed by the merging firms on the non-merging units in the same locations, which tends to counteract the increase in the composite price (or overall cost of shopping) in the locations with a merger. Since however some of the outsiders are harmed, we also consider how the possibility of a subsequent merger by the initially harmed outsiders may change the incentives for the first integration. Our results show that if the number of firms is sufficiently large, then the initial merger will still be carried through. It follows then that there would be a real need for regulation: market power and market interactions may provide firms with incentives to merge, just like efficiency gains do. ► We analyse merger incentives in a spatial competition model with complementarities. ► With only a two-firm merger the participants benefit more than any outsiders. ► This is due to the negative demand externality imposed on some of the outsiders. ► Subsequent mergers by these outsiders may alter the incentives for the first merger. ► If the number of firms is sufficiently large the disincentive to merge disappears.