Post-Merger Product Repositioning

We study mergers among firms that compete by simultaneously choosing price and location. The merged firm moves its two products away from each other to reduce cannibalization, and the nonmerging firms move their products in between the merging firm’s products. Post-merger repositioning increases product variety, which benefits consumers, but repositioning also affects post-merger prices in two ways: There is upward pressure on price as products spread out, but the merged firm’s incentive to raise prices is reduced as its products are moved away from each other. Either effect can dominate, although the latter is likely to be the more important. We use a novel technique known as the stochastic response dynamic to find equilibria, which does not require the computation of first-order conditions. ∗The University of Chicago. The authors acknowledge useful comments from Simon Anderson, Jon Hamilton, Charlotte Manning, Janet McDavid, and Steve Salop. †Owen Graduate School of Management, Vanderbilt University. The paper was written while Luke Froeb was Director of the Bureau of Economics, Federal Trade Commission. The views of expressed herein do not purport to represent those of the Federal Trade Commission or any of its commissioners. ‡Department of Mathematics, Vanderbilt University. §Antitrust Division, U.S. Department of Justice. The views expressed herein are not purported to reflect those of the U.S. Department of Justice.