Mergers in which price and quality are set by bargaining

Mergers of horizontal competitors may affect product quality as well as price. For example,potential quality effects are often considered when analyzing healthcare mergers. There exists asmall theoretical literature on the effects of mergers on quality when price and quality are chosenby a seller. In this paper, we examine mergers of sellers (e.g., healthcare providers) whose priceand quality is set via bilateral bargaining with buyers (e.g., insurers). In our model, the effect ofa competition-reducing merger on quality depends solely on whether or not the buyer’s marginalrate of substitution of quality for price is decreasing, a concept related to quality being a normalgood