The Economics of Corporate Governance and Mergers
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The Economics of Corporate Governance and Mergers

Edited by Klaus Gugler and B. Burcin Yurtoglu

This book provides an insightful view of major issues in the economics of corporate governance (CG) and mergers. It presents a systematic update on the developments in the two fields during the last decade, as well as highlighting the neglected topics in CG research, such as the role of boards, CG and public interest and the relation of CG to mergers. Two important conclusions can be drawn from this book: the first is that corporate governance systems that better align shareholders’ and managers’ interests lead to better corporate performance; second, there is an important relationship between CG structures and the quality of firm decision-making, one of the most important being the decision to merge or take over another firm.
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Chapter 13: Vertical Mergers in Markets with Network Effects

Gerhard Clemenz


13. Vertical mergers in markets with network effects Gerhard Clemenz INTRODUCTION This chapter investigates the impact of vertical mergers between producers and retailers on social welfare and consumer surplus if the goods under consideration display network effects and are not compatible with each other. It is shown that vertical integration is indeed harmful for consumers because the integrated firm is able to exploit the network effect in such a way that the other producer is effectively kept out of the market and consumers have to pay higher retail prices. Formally we analyze a model with two producers, each of them producing a network good which is not compatible with the other good. Consumers buy one of the products from a retailer and enjoy utility from a network effect which is increasing in the number of consumers who buy the same brand. There are two retailers who engage in spatial competition which is modeled in the fashion of Hotelling’s linear city model. We compare three different market configurations. In the first scenario all four firms are independent. There exist two types of equilibrium. In a symmetric non-standardization equilibrium both brands are sold and have equal market shares. In contrast to several models in the literature on network goods (for example Shy, 2001; Farrell and Saloner, 1992) such an equilibrium exists also if the network effect dominates the traveling costs. In an asymmetric standardization equilibrium one brand captures the entire market. Due to spatial...

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