Horizontal Mergers in the Presence of Network Externalities

Abstract

Evaluating network effects and two-sidedness is critical for merger control in the digital economy.
To examine the impact of network effects on the welfare properties of mergers, this study analyzes a model of multiproduct-firm oligopoly with firm-level network externalities using an aggregative-games approach. The analysis shows that network externalities increase both the consumer benefits of mergers through network expansion and the cost of accompanying market power. The former justifies small mergers, but the latter makes mergers between dominant firms more likely to hurt consumers. An extension to two-sided markets indicates that an increase in the size of the merged entity on one side can benefit the consumers on the other side even without the direct benefits of network expansion, because of the changes in the platform's cross-subsidization incentives. Further, this study illustrates how the pre-merger prices and market shares of merging parties can predict the effects of mergers on consumers in two-sided markets.

Keywords: aggregative games, merger policy, network externalities, two-sided markets

JEL Classification: L13, L41