Pre‐emptive merger in a composite good framework

Abstract

We construct a model of partial merger when there are three goods and three firms and consumers need two goods to complete their consumption. Therefore these are composite goods which have both competitive and complementary feature. We study pre-emptive incentives of firms for merger, given a target firm. We show that vertical merger strictly dominates horizontal merger. Pre-emption decision is prompted more by the amount of loss if the rival goes for merger. The paper also provides a welfare analysis. While all firms merger maximizes social welfare, under vertical merger consumers are always better off. Industry profit also goes up if the goods are not so close substitutes.