Spatial price discrimination and the merger paradox

Abstract A familiar result in the literature on mergers is that the principal beneficiaries from such activity are the firms which are excluded from participation. The possible existence of this ‘merger paradox’ contrasts strongly with the frequently expressed view that merger is anti-competitive. This paper examines the question within the context of a model of spatial competition in which firms choose their locations in anticipation of forming a merger, and practise price-discrimination. We allow for differences in firms’ shares in the benefits of merger, and for the possibility that the firms will attach probabilities to merger formation.

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