Merger under horizontal and vertical product differentiation

Abstract

This paper studies the possibility of a merger when firms are asymmetric in marginal costs and produce vertically and horizontally differentiated products. The merger of two firms that produce the better-quality products (w.r.t. third firm) is possible, if the quality difference (net of cost) or the horizontal product differentiation between the firms that merge is high. If the quality difference (net of cost) between the merged firms and the non-merged firm increases, then a merger is possible if the quality difference (net of cost) and the horizontal product differentiation of the merged firms are significantly high.