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Spatial Competition and Location with Mergers and Product Licensing

Department of Economics, Tufts University, MedFord, MA 02155, USA, gnorman{at}emerald.tufts.edu

Lynne Pepall

Department of Economics, Tufts University, MedFord, MA 02155, USA, lpepal01{at}emerald.tufts.edu

This paper analyses mergers by Cournot firms producing differentiated products in a spatial market with product licensing by the merged firms. Product licensing allows the merged firms to co-ordinate their locations. If the degree of differentiation is not 'too low', a two-firm merger is more profitable for the merged firms than for the non-merged firms. The locational advantage created by the merger leads to the additional profit from the merger being an increasing function of the number of firms in the market. A two-firm merger generally increases total surplus and is therefore efficiency-enhancing. Moreover, there are circumstances in which every firm in the market wants to find a merger partner, consistent with the wave of mergers characteristic of many markets.

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