Mergers with Quality Differentiated Goods
Matthew J. Baker and Pamela M. Schmitt
We consider the impact of merger on the equilibrium price and quality of products. Consumer demand for both products depends not only on own price and quality, but also on the price and quality of the other product. We consider cases in which firms produce gross complements and gross substitutes. In both cases, merger may lower or increase both product price and quality. When firms produce complements, merger may lower price and increase quality. We also find that there are situations under which merger between firms producing substitutes increases welfare. We also find that merger may result in higher product quality but lower social welfare, or lower product quality but higher social welfare.