Working Paper No. 03-10

Mergers and Acquisitions in Network Industries
(Revision of Working Paper No. 03-07)
Collin Starkweather
November 2003

ABSTRACT

Information goods characterized by strong positive network externalities and effects are playing an increasingly prominent economic role. In this paper, a merger simulation is performed using a logit model of oligopolistic competition incorporating network externalities and effects.

While the model possesses features common to models detailed in the network literature, it provides a variety of new insights into producer and consumer behavior in such markets. Oligopoly producers are found to respond to higher price elasticities with lower prices and markups. Strategic behaviors arise that do not exist in the absence of network externalities. Network externalities are found to dramatically impact post-merger prices and market concentration.

JEL classification: D11; D43; L13; L40

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