In a forthcoming paper in Economic Inquiry, Partner Jeremy Sandford, alongside David J. Balan (Econ One), examines how horizontal mergers affect product quality in environments where prices and terms are determined through bilateral bargaining.
While existing research indicates mergers may either decrease or increase quality, the paper shows that in bargaining settings a merger that weakens buyers’ bargaining leverage reduces quality if buyers are less willing to trade off price for quality as prices rise, a condition closely related to quality being a normal good. The findings are particularly relevant to healthcare, procurement, and other settings where prices and terms are determined through bargaining.
Abstract
We study the effects of horizontal mergers on product quality in a bilateral bargaining environment. In our model, a competition-reducing merger reduces equilibrium quality as long as the buyer’s marginal rate of substitution of quality for price declines with price, holding quality constant. This condition is closely related to quality being a normal good. This result holds when price and quality are jointly negotiated, and it extends to a sequential setting in which sellers first choose quality and then bargain with buyers over price. We discuss applications to procurement and healthcare markets, as well as several extensions.
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The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Econic Partners or its clients.
