Merger under Spatial Competition

Abstract

This paper studies the relationship between merger activity and choice of location under conditions of spatial price discrimination. We consider an industry containing three firms, of which two make up the merged entity and the third remains an 'outsider'. In this type of model, the location choices of the parties to a merger reflect their individual shares in post-merger profits. We show in particular that: the presence of the outside firm has an important role to play in the determination of the equilibrium set of locations within the market; the overall as well as the individual (per-firm) profitability of merger depends upon the firms' relative shares in the gains from this activity; the profitability of the outside firm may be either increased or decreased by the merger; the profitability of entry into the industry depends upon the ownership structure of the existing firms.