Endogenous Mergers under Multi-Market

This paper examines a simple model of strategic interactions among rms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when \u85rms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play out. The rst is the selection e¤ect, which acts to increase welfare, as shutting down the relatively more ine ¢ cient \u85rm is bene\u85cial. The second op-posing e¤ect is the internalisation of the Cournot externality e¤ect; reducing the production of good 2 allows \u85rms to sustain a higher price for good 1. This works to increase prices and, therefore, decrease consumer surplus (but increasing producer surplus). These two e¤ects are inuenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2. JEL Classi\u85cation: L11, L13, L44