Date Added: Sep 2009
The authors present a model with firms selling (homogeneous) products in two imperfectly segmented markets (a "High-Demand" and a "Low-Demand" market). Buyers are mobile but restricted by transportation costs, so that imperfect arbitrage occurs when prices differ in both markets. They show that equilibria are distorted away from Cornet outcomes to prevent consumer arbitrage. Furthermore, a merger can lead to equilibrium in which only the "High-Demand" market is served. This is more likely the lower consumers' transportation costs and the higher the concentration of the industry. Therefore, merger incentives are much larger than standard analysis suggests.