WORKING PAPER Mergers in a Cournot Model of Spatial Competition: Urban Sprawl and Product Specialization

This paper investigates the profitability and locational effects of mergers when firms play a Cournot game and compete in spatially differentiated markets. A two-firm merger is generally profitable in these types of markets because the merged partners can coordinate their location decisions. The merged firm locates its plants outside the market quartiles with distance from the market center being an increasing function of the number of non-merged firms remaining at the market center. Profitable two-firm mergers reduce competitive pressure, leading to higher prices and reduced consumer surplus. The increased profits of both the merged firm and the other firms are such that total surplus rises as a result of the merger. When we allow for the possibility of several two-firm mergers, three sets of agglomerations emerge. The merged firms agglomerate their activities at locations outside the market quartiles while the non-merged firms remain agglomerated at the center. This outcome is consistent with the idea that multi-facility production will lead to urban sprawl. In the context of product differentiation, mergers lead to greater product diversity as the merged firm(s) tailor products to serve better the more peripheral segments of the market.