abstract

Why have so many firms pursued cross-border mergers during the past decade, whereas competitive entry was predominant in the decades before? This paper departs from the conjecture that an entrant may find it preferable to enter and compete instead of merging with the incumbent and matching product characteristics if her product is sufficiently strongly differentiated from the incumbent's. The conjecture rests on the observation that, after a merger, the jointly offered products generally become more unified. The conjecture is shown to hold in a simple linear city model of product differentiation under certain conditions. A variant of the conjecture is also shown to hold in a special case of two-dimensional characteristics with continuous demand. The intuition for the results is that entry without merging product characteristics allows to extract more consumer rent when consumers are sufficiently sensitive to product differentiation. The simple models exhibits limitations, however. I therefore indicate possible directions for future research.