Competition and Merger in Network Economy

Abstract

This thesis is concerned about firm’s merger and competition behavior in modern
economies in which networks are ever-more important and how to optimize merger
policy when network externalities present. As a demand-side economics of scale,
network externalities bring benefit to consumers through merger and acquisition if the
products from different firms are incompatible. Hence, a merger, which is both
socially optimal and privately profitable, can exist without considering the
supply-side economies of scale. Merger policy should be revised to be able to
recognize these “good” mergers and encourage them. Firm’s incentive to merge is
enlarged by network effect because merged entities can benefit from a larger network,
which increases the demand for their product. Moreover, merger and acquisition in
network world give the merged entities an advantage in competition over the firms
who stand outside the merger. One of the explanations for this advantage is merged
entity may inherit indirect network resources, for example complementary products
producers, from all merged firms, since the mobile of these resources are costly and
slow. Acquiring more firms brings more indirect network resources to merged entity,
which makes the products of merged entity more valuable to the consumers. Thus the
merged entity can charge a higher price or squeeze more market share. Merged entity
can obtain locked-in consumers from all merged firms is another explanation of the
advantage. For some information products, such as TV subscription, internet access
and mobile phone service, consumers need to sign a contract with the service provider
and are locked by these contracts for a fixed period. Merged entity may inherit these
locked-in consumers and show a larger initial network to the consumers who are not
locked at the beginning of the competition. Social planner should be cautious to the
merger in network world because network externalities magnify the power of the
merger, which may be utilized by the firms to get dominant position.

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