Market Power of Multiproduct Firms and Price Coordination in the Industry

The majority of industrial economics works deals with competition between mono-product firms. However, the hypothesis of mono-product competition is a very poor representation of the observed reality in the industry. In this chapter, we revisit two classical examples of merger regulation. We show how the analysis of multi-store competition may be complex and may require a more sophisticated modeling than the classical models used in mono-store framework. We provide notably, an appropriable tool to discuss the power of a multi-store firm to stimulate price co-ordination in the industry. We use general models to derive specific price equilibrium applying to collusive price behavior between multi-store firms and mono-store firms. We show how the multi-store firm may find strategically advantageous to base its pricing policy on the degree of substitutability of its product line with respect to those offered by its competing rivals. Finally, we show that the decisive factor in establishing multi-store initiated cartelization may be (i) the number of firms included in the cartelization and (ii) the location of the independent store relative to those owned by the dominant firm. These two elements can indeed be as decisive as the total number of players in the market.

Keywords: Bertrand-Nash equilibrium, cartelization, circular model, collusion feasibility, location, merger regulation, multi-product firms, multi-store firms, outsiders, price coordination.