To centralize or decentralize: Mergers under price and quality competition

Abstract

This paper examines firms' post-merger integration (PMI) strategy under price and service-quality competition when facing either deterministic or stochastic demand. Although horizontal mergers are prevalent in practice and have been analyzed extensively in the literature, little attention has been paid to the choice of PMI level. We develop a game-theoretic model, in which multiple firms compete on price and service quality with either deterministic or stochastic demand, and two of them decide whether and how to merge. The post-merger firm can enjoy higher cost efficiency due to cost synergy and needs to choose between centralized and decentralized mergers (i.e., PMI level). A centralized merger allows centralized decision-making and inventory pooling for the two participant firms, while a decentralized merger allows decentralized decision-making and inventory transshipment between the participant firms. We highlight some interesting findings. First, under either deterministic or stochastic demand, we find that a centralized merger is not always beneficial since its collusion effect may induce the nonparticipant firm to adopt more aggressive strategies, and thus a decentralized merger may be more profitable and preferred by the post-merger firm as it allows competition between the participants and leads to a more balanced market. Second, in a decentralized merger, stronger fixed cost synergy may backfire and hurt each participant as it could intensify service-quality competition between the two participants, and risk pooling (via inventory transshipment) under stochastic demand may even reduce the participant firms' profits as it may intensify both service-quality and price competition. Third, a participant firm's service quality, price, and in-stock probability may be either improved or reduced after merging, depending on the PMI level, cost synergy, demand sensitivity, and demand uncertainty.

The effects of common ownership on price and quality decisions in competing supply chains

“…Wang et al (2017) further discuss the role of consumer loyalty in price-quality competition and channel structures. Guo et al (2023) examine the effects of horizontal merge strategy (centralized merge and decentralized merge) on price and quality competition under deterministic and stochastic demand. Li and Chen (2018) study the effects of brand differentiation on price and quality competition in common retailer channel.…”

Information sharing and production mode selection with price and quality competition

“…There is a growing body of research that focuses on horizontal price and quality competition between manufacturers or retailers (Banker et al., 1998; Matsubayashi, 2007; Wang et al., 2017; He and Ma, 2024; Wang et al., 2022; Guo et al., 2023). However, our study is closely related to price and quality competition between retailers and manufacturers.…”

Dynamic strategy for low-carbon supply chain considering retailers competition and technological innovation

“…For instance, the well-known soft drink brand Coca-Cola has over 1,300,000 distribution points globally, resulting in evident competition among these distribution outlets [21] , [22] . In this context, businesses within the supply chain frequently enhance their competitiveness and expand their market share through various forms of collaboration and mergers [23] , [24] . For example, Wangfujing and Bailian Group engaged in horizontal mergers to consolidate the market, weaken competition, and enhance bargaining power [25] .…”