Mergers under endogenous minimum quality standard: a note

Fig. 1 Consumers distribution with and without low-quality merger

Uncovered market Firm 2-3          Firm 1

' With merger

merger

This merger is profitable, however MQS induces a low quality higher than the
unregulated one by leading to a strong reduction in the differentiation between
the high qualities and a slight increase in the differentiation between the low
qualities. Although such a merger increases the market coverage the regulated
quality is so high that the low-quality firm obtains a negative profit therefore it
would leave the market.

3.3 Monopoly mergers

When firm 3 exists the market the high-quality merger leads to a monopoly in
which the MQS is applied to firm 2. The merger between 1 and 2 leads to:

P^M = ! 91 P2 = ¹ 12                       (18)

11 = 0.25, ιi = 0                        (19)

II₁M = 0.03125                              (20)

CS^m = 0.03125, W^m = 0.0625                  (21)

This merger is clearly profitable and all consumers are worse-off: i) half
consumers are now out of the market, ii) consumers that consume the highest
quality even after the merger pay more for a lower quality. However, if the reg-
ulator did not announce the MQS, then firms would always choose a monopoly
merger. Since the consumers surplus is only affected by the high quality, then
any monopoly (arisen from a three-firm or a bilateral merger) induces the same

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