Operational Decisions under the Influence of Government Regulation

In the first chapter, I investigate a merger between price-setting newsvendors in an oligopolistic market. It is well-known that inventory pooling can greatly reduce inventory costs in a centralized distribution system because it helps reduce aggregate demand uncertainty. Although such statistical economies of scale are important benefits of a retail merger, the extant literature models cost savings from a merger only through reduction in a post-merger firm’s marginal cost. In this paper, I develop a model of a retail merger under uncertain demand that distinguishes between cost savings from conventional economies of scale and those from statistical economies of scale. I show that these two sources of cost savings have substantially different impacts on firms’ decisions in a post-merger market. Specifically, and contrary to the existing theory of mergers developed under deterministic demand, I find that although inventory pooling enables the post-merger firm to achieve cost savings, it always induces firms to raise their prices, and that marginal cost reduction induces firms to lower their prices only when it is substantial – consequently, larger marginal cost reduction can benefit even nonparticipant firms when it induces the post-merger firm to raise its price. Finally, even if a merger induces all firms to raise their prices, it can still improve expected consumer welfare by increasing firms’ service levels under uncertain demand.