Horizontal Mergers with Free Entry in Differentiated Oligopolies

Antitrust authorities view the possibility of entry as a key determinant of whether a proposed merger will be harmful to society. This paper examines the effects of horizontal mergers in models of non-localized, differentiated Bertrand oligopoly that allow for free entry. The analysis of the long run effects of mergers in differentiated products markets raises issues that are significantly different from those in the short run or in homogeneous products markets due to the introduction of new varieties. Our analysis reveals that determining the properties of consumer preferences is crucial to the antitrust analysis of mergers in differentiated products markets. Specifically, we show that if the demand system satisfies the Independence from Irrelevant Alternatives (IIA) property and if the number of firms is treated as a continuous variable, mergers in differentiated products markets have no long run effect on consumer welfare. Moreover, in this case, marginal cost savings are to a large extent irrelevant to the consumer welfare effects of mergers. If the number of firms is treated as a discrete variable, fixed or marginal cost savings are a necessary condition for mergers to have zero or positive effect on consumer welfare. Using the example of linear demand, we show that if the demand system does not satisfy the IIA property, mergers in differentiated products markets can harm consumer welfare in long run equilibrium. Moreover, the amount of harm increases with consumers’ taste for variety.