Switching Costs and the Timing of Merger-Induced Price Changes

Abstract

This paper formalizes a non-cooperative explanation for pre-merger price increases. When consumers face switching costs, firms have strong incentives to offer bargain prices to lock in consumers whom they can exploit in the future. A future merger reduces a firm's incentive to gain current market share, however, because the firm anticipates sharing future profits. Focusing on near-term profit, it chooses pre-merger prices higher than prices absent a merger. This obtains for both horizontally related and unrelated merging partners. Mergers are profitable in both cases. Price dynamics depend on the horizontal relationship. These results have implications for empirical work on mergers.

Keywords: mergers, switching costs, spatial competition, oligopoly

JEL Classification: L4