Incentives to Form Coalitions with Bertrand Competition

Issue: Winter 1985

Pages: pp. 473-486

Authors: Raymond Deneckere and Carl Davidson

Title: Incentives to Form Coalitions with Bertrand Competition

Abstract: In this article we investigate the incentive to merge when firms that produce differentiated products engage in price competition. We demonstrate that mergers of any size are beneficial and are so increasingly: large mergers yield higher profits than smaller ones. This is in contrast to the result that mergers tend to be disadvantageous in quantity-setting games. This qualitative difference follows from the fact that reaction functions are typically upward sloping in price games but downward sloping in quantity games. Thus, the reaction of outsiders reinforces the initial price increase that results from the merger.

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