On the “merger paradox” in price competition with asymmetric product differentiation

By assuming asymmetric product differentiation, we consider the “merger paradox” in price competition (or the incentive to collude in prices). We investigate whether the emergence of the merger paradox depends on the degree of product differentiation between firms. In particular, unlike Deneckere and Davidson (1985), we demonstrate that if the degree of product differentiation between the insider and outsider is sufficiently small, then they are strategic substitutes, and thus, the merger paradox arises in price competition.