Welfare decreasing endogenous mergers between producers of complementary goods

This paper investigates the competitive effects of mergers involving producers of complementary goods, which are usually considered to be welfare increasing, in a setting where: (i) consumers need to purchase two components to make up a system; and (ii) there is competition between two vertically differentiated producers of one of the components whereas the second (must-have) component is monopolized. We find that the (privately profitable) merger involving the low quality producer of one component and the monopolist producer of the other component may decrease both consumers’ surplus and social welfare for parameter values such that this merger can endogenously occur.