Lecture 6. extra slide (after slide 24)

Lecture 6. extra slide (after slide 24) - • The final...

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Unformatted text preview: • The final impact of integration on firm profits depends on two forces: 1. A negative competition effect: Integration leads to an immediate increase in the total number of firms in the market, which has a negative effect on profits. 2. A positive market size effect: Integration leads to an immediate increase in the size of the market, which raises the demand elasticity of every firm. • To take advantage of a larger market size, firms must reduce their price. • But the ability of firms to reduce price varies across firms - high productivity firms can reduce their prices by large amounts since they had large mark-ups before integration; low productivity firms cannot reduce their prices by too much since then their markups will become negative. 1 ...
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