Merger, Partial Collusion and Relocation

We set up a three-firm model of spatial competition to analyse how a merger affects the incentives for relocation, and conversely, how the possibility of relocation affects the profitability of the merger, particularly for the non-partici-pating firm. We also consider the cases of partial collusion in either prices or locations. Under the assumption of mill pricing, we find that a merger will generally induce the merger participants to relocate, but the direction of reloca-tion is ambiguous, and dependent on the degree of convexity in the consumers’ transportation cost function. Furthermore, we identify a set of parameter values for which the free-rider effect of a merger vanishes, implying that the possibility of relocation could solve the ‘‘merger paradox’’