The Economics of Post-Merger Product Repositioning

Josh Wright —  15 April 2008

Amit Gandhi, Luke Froeb, Steven Tschantz and Gregory Werden have published “Post-Merger Product Repositioning” in the Journal of Industrial Economics.  (HT: Luke).  The critical insight is that the conventional unilateral effect incentive to raise prices post-merger is offset by the incentive to “separate” in product space.  Here is the abstract:

This paper analyzes the effects of mergers between firms competing by simultaneously choosing price and location.  Products combined by a merger are repositioned in away from each other to reduce cannibalization, and non-merging substitutes are, in response, repositioned between the merged products.  This repositioning greatly reduces the merged firm’s incentive to raise prices and thus substantially mitigates the anticompetitive effects of the merger.  Computation of, and selection among, equilibria is done with a novel technique known as stochastic response dynamic, which does not require computation of first-order conditions.