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Mergers in Imperfectly Segmented Markets

Discussion Papers 919, 35 S.

Pio Baake, Christian Wey


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We present a model with firms selling (homogeneous) products in two imperfectly segmented markets (a "high-demand" and a "low-demand" market). Buyers are mobile but restricted by transportation costs, so that imperfect arbitrage occurs when prices differ in both markets. We show that equilibria are distorted away from Cournot outcomes to prevent consumer arbitrage. Furthermore, a merger can lead to an equilibrium in which only the "high-demand" market is served. This is more likely (i) the lower consumers' transportation costs and (ii) the higher the concentration of the industry. Therefore, merger incentives are much larger than standard analysis suggests.

Pio Baake

Research Director Regulation in the Firms and Markets Department

JEL-Classification: D43;L13;L41
Keywords: Imperfect Market Segmentation, Oligopoly, Price Discrimination, Consumer Arbitrage, Mergers
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