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The Effects of Mergers in Open Auction Markets

Keith A. Waehrer and Martin Perry


A buyer solicits bids from suppliers with different cost distributions. The cost distribution of a supplier is defined by its capacity. The expected market share of each supplier is the ratio of its capacity to the industry capacity. If the buyer's reserve price is fixed, mergers increase industry concentration, increase the expected price, and reduce the buyer's welfare. Moreover, suppliers have an incentive to merge. If the buyer can optimally lower the reserve price, he can partially or fully offset the effects of a merger. However, a merger still reduces the buyer's welfare because he must forego some gains from trade when he lowers the reserve price. The optimal reserve price can undermine the incentive for larger suppliers to merge and result in stable industry structures for which no further mergers would be profitable.