Horizontal Mergers in the Presence of Network Externalities

Abstract

Evaluating network effects and two-sidedness is critical for merger control in the digital economy. To examine the impact of network effects on the welfare properties of mergers, this study analyzes a model of multiproduct-firm oligopoly with firm-level direct and indirect network externalities using an aggregative-games approach. The analysis shows that network externalities increase both the consumer benefits of mergers through network expansion and the cost of accompanying market power. The former justifies mergers involving small firms, but the latter makes mergers between dominant firms more likely to hurt consumers. In two-sided markets, the effect of mergers on consumer surplus depends on merging parties' pre-merger price structures. In particular, when a consumer group is subsidized through two-sided pricing by merging parties, such consumers are likely to benefit from mergers. These results provide theoretical guidance on merger policy toward platforms.