Mergers when price and quality are set by bargaining

Abstract

We study the effects of horizontal mergers on product quality in a bilateral bargaining environment. In our model, a competition-reducing merger reduces equilibrium quality as long as the buyer's marginal rate of substitution of quality for price declines with price, holding quality constant. This condition is closely related to quality being a normal good. This result holds when price and quality are jointly negotiated, and it extends to a sequential setting in which sellers first choose quality and then bargain with buyers over price. We discuss applications to procurement and healthcare markets, as well as several extensions.