『経済研究』（明治学院大学）第 151 号

2016 年Inter-Industrial Integration:
M&A with Related Goods in Demand＊
Jinryo TAKASAKI
Department of Economics
Meiji Gakuin University

1．Introduction
It has been known that if two firms whose products are perfectly complementary each othermerge or collude, then the consumer prices of the complements lower (Cournot［2］, Tirole［8］,Economedes and Salop［3］). However we find very few examples of the perfect complements in thereal consumer’s markets. Takasaki［7］showed that the almost same result follows when the products are ‘imperfect’ complements under moderate conditions.
Takasaki［7］also includes a generalization of perfectly substitute goods case, i.e. we show thatthe merger in the case of ‘imperfect’ substitutes tend to make consumer prices (quantities of thegoods) higher (decrease).
After Takasaki［7］, many researches with the same results appeared. However they arebased on the assumption of simple linear demand curves. Our general models also show the limits of
their analysis.

2．Basic Definitions and Assumptions
We assume that any function used in this paper is twice continuously differentiable. Other basic and technical assumptions are summarized by Assumption 1 and 2.
＊This paper is a revised version of Takasaki［7］.
1『経済研究』（明治学院大学）第 151 号(Definition 1) There are n goods. Let xi and pi denote the quantity and the price of good i ( i＝n
→ R＋, are1, 2, ..., n). The market demand functions of these goods, D i：R＋＋

xi＝D i( p)i＝1, 2, ... , n(1)where p＝( p1, p2, ... , pn). Equation(1) is also expressed by x＝D ( p) using the notations x＝( x1, x2, ... , xn)Tand D ( p)＝(D 1( p), D 2( p), ... , D n( p))T where T means transposition of vector.
nand let D ji denote ∂xi/∂pj. We call goods i and j ( i ≠ j)
(Definition 2) Let O be an open set in R＋＋‘gross substitutes in O’ if
D ji ＞ 0, D ij ＞ 0 for all p∈O(2),

and we call them ‘gross complements in O’ if
D ji ＜ 0, D ji ＜ 0 for all p∈O(3).

Hereafter, we call ‘gross substitutes’ and ‘gross complements’ simply ‘substitutes’ and ‘complements’ respectively.
(Assumption 1) D ( p) has its inverse p(x)≡( p1 (x), p2 (x), ... , pn (x))T and
D 11 ..... D 1m
D ii ＜ 0,(－1)m ..... ..... ..... ＞ 0
D 1 .....
mi＝1, 2, .... , n

m≤n

(4).

D mm

Equation (4) is interpreted as Hicksian stability condition when the supplies are fixed.
(Definition 3)

The total cost function of good i is denoted by
C i＝C i (xi)i＝1, 2, ... , n(5)and its marginal cost function is denoted by
MC i＝dC i/dxi

i＝1, 2, ... , n(6).

In order to extract pure effect of complementarity or substitution in consumption, we exclude
such technological properties of multi-product cost function as ‘economies of scope’ or ‘cost complementarity’.
(Definition 4)

The profit function of a single-product firm which produces good i is
πi＝πi(x)＝xi pi (x)－C i(xi)(7)πi＝πi(D ( p))＝D i ( p)pi－C i(D i( p))(8),or alternatively
and the marginal profit function is denoted by
φi(x)≡∂πi/∂xi
2(9)Inter-Industrial Integration: M&A with Related Goods in Demandorψi( p)≡∂πi/∂pi(10).

The profit function of a multi-product firm is

∑π

(11)

i

i∈S

where S is the set of the goods produced by the firm.
(Assumption 2)

Each profit maximization problem (not only for a single-product firm but also

for a multi-product firm) has the unique and positive solution.
(Definition 5)

Define φji≡∂φi/∂xj. Quantities xi and xj are called ‘strategic substitutes’ when

the following inequality holds:
φji ＜ 0φij ＜ 0i≠j(12)

and called ‘strategic complements’ when the following holds: (See［1］1985 in the references.)φji ＞ 0
(Definition 6)

φij ＞ 0

i≠j

(13).

Define ψji≡∂ψi/∂pj. Prices pi and pj are called ‘strategic substitutes’ when thefollowing inequalities hold:ψji ＜ 0

ψij ＜ 0i≠j(14)

and called ‘strategic complement’ when the following inequalities hold: (See also［1］1985.)
ψji ＞ 0
(Definition 7)

ψij ＞ 0

i≠j

(15).

An open interval {u：a ＜ u ＜ b}⊂R＋n with a,b∈R＋n is called a ‘relevant regionof y and z’ if y and z belong to the interval.
The definitions and assumptions in this section are commonly used below. And we often denotethe solutions for quantities (prices) before and after merger by xo and x＊ ( po and p＊) respectively.

3．Quantity Competition and Merger
3-1

Basic Analysis
In this basic analysis we investigate the effect of merger between 2 firms on quantities undersome additional assumptions. We consider alternative definitions of ‘substitutes’ and ‘complements’.
(Definition 8)’ if
Let O′be an open set in R＋n＋. We call goods i and j ( i ≠ j) ‘substitutes in O′3

『経済研究』（明治学院大学）第 151 号∂pi /∂xj ＜ 0∂pj /∂xi ＜ 0for all x∈O′

(16),

∂pj /∂xi ＞ 0

for all x∈O′

(17).

and we call them ‘complements in O′’ if∂pi /∂xj ＞ 0

The meaning of Definition 8 is as follows: When xj increases, consumers try to decrease (increase) xi if these goods are substitute (complementary). In order to keep xi constant (a meaning ofpartial derivatives), pi must lower (rise). We show that Definition 8 is equivalent to Definition 2 under
our assumptions when n＝2. Substitute p (x) into D ( p), and differentiate the identity x≡D ( p (x)) by x.
Then we have I＝∂x/∂p・∂p/∂x ( I is the identity matrix) or alternatively［∂x/∂p］－1＝∂p/∂x. When n＝2,
the latter equation is expressed more precisely as follows:


D 22

－D 12

－D 21

D 11

＝

∂p1/∂x1 ∂p1/∂x2

D 11 D 12∂p2/∂x1 ∂p2/∂x2

D 21 D 22(18).

The determinant of the right-hand side of (18) is positive by Assumption 1 (equation (4)).
Therefore Definition 2 and 8 are equivalent.
We assume that firm i produces only good i (i＝1, 2) and compete in quantity, then we investigate the effect of merger or collusion. Before merger or collusion, each firm maximizes its own profit
πi. After merger or collusion, they maximize their joint profit π1＋π2. The first order condition for theformer case isφi (x1, x2 )＝

∂pi
∂xi

xi＋pi－MC i＝0

i＝1, 2

(19)

i≠j

(20).

and that for the latter case isφi (x1, x2 )＝－

  

∂pj
∂xi

i, j＝1, 2

xj

We denote the solutions of (19) and (20) by ( x o1, x o2 ) and (x＊1 , x＊2 ) respectively. We have assumed
the existence of the unique positive solution (the second order condition) for both cases (Assumption
2).
(Assumption 3)
The following inequalities hold in a relevant region of ( xo1, xo2 ) and ( x＊1 , x＊2 ).
φii ＜ 0,φii φjiφij φjj＞0i, j＝1, 2

i≠j

(21).

This assumption corresponds to the stability condition of Cournot ( i.e. quantity competition)model.
Let us define function f as follows:f ( x1, x2)≡(－φ1 ( x1, x2), －φ2 ( x1, x2 ) )T
4

(22).

Inter-Industrial Integration: M&A with Related Goods in Demand

Jacobian of f and its principal minors ( i.e. －φ11 and －φ22 ) are all positive by Assumption 3 .
When two goods are complements in the relevant region, the right-hand side of equation (20) is negative. According to equations of (19) and (20), it follows thatf ( xo1, xo2) ＜ f ( x＊1 , x＊2 )(23).

By theorem 3 of Gale and Nikaido［4］1965, inequality (23) has no solution in any region with
o
1

o
2

( x , x ) ≥ ( x＊1 , x＊2 ). Therefore we arrive at the following proposition.
(Proposition 1)

In the case of quantity competition, merger or collusion between two firms

who produce complementary goods increases the quantity of at least one of the two goods.
When these goods are substitutes, the right-hand side of equation (20) is positive by the definition. We can obtain another proposition by similar discussion as previous.
(Proposition 2)

In the case of quantity competition, merger or collusion between two firms

who produce substitute goods decreases the quantity of at least one of the two goods.
When goods are complements and xi ∂2pi/∂xi ∂xj is positive or negligible, inequality (13) in Definition 5 holds. Therefore ‘strategic complements’ case is highly plausible.
(Proposition 3)

If two firms compete in quantity and the quantities are strategic comple-

ments in a relevant region, merger or collusion between two firms who produce complementary
goods increases the quantities of both goods.
The proof is as follows: If x＊i ≤ xoi for some i, then x＊j ＞ xoj for j ≠ i by Proposition 1. The function
φi is a decreasing function of xi in a relevant region by Assumption 3 and an increasing function of xj
because the quantities are strategic complements. Therefore it must be that φi( xo1, xo2) ＜φi( x＊1 , x＊2 ). This
result contradicts equations (19) and (20) with our definition of complementary goods.
Furthermore, recalling the same argument that proved Proposition 1 and 2, we obtain the following proposition.
(Proposition 4)

If two firms whose products are complementary compete in quantity and thequantities are strategic complements, the merger or collusion between the firms lowers the price ofat least one of the two goods.
This proposition holds because the Jacobian of －D( p) and its principal minors are positive by5

『経済研究』（明治学院大学）第 151 号

Assumption 1 , and both quantities increase when the firms merge by Proposition 3 (again we use
theorem 3 of Gale and Nikaido［4］1965).
We show an example in which both quantities increase (decrease) and both prices lower (rise)by merger in complementary (substitute) goods case.
Demand functions:
x2＝ap2＋bp1＋c⎱―⎱―⎱x1＝ap1＋bp2＋c

a ＜ 0, c ＞ 0, a2－b2 ＞ 0(24)

b ＞ 0 if goods are substitutes.
b ＜ 0 if goods are complements.
C i＝mxi ,Cost functions:m ＞ 0,

i＝1, 2(25)

Here c is sufficiently large so that am＋bm＋c ＞ 0 (This assumption is quite reasonable because am＋bm＋c is the quantity demanded by consumers when both firms adopt marginal cost pricing).
The solutions in this example are as follows:
xoi ＝
x＊i ＝

(a－b)(am＋bm＋c)
2a－b
am＋bm＋cpi ( xo1, xo2)＝
pi ( x＊1 , x＊2 )＝2(a2－b2)m－ac(2a－b)(a＋b)(a＋b)m－c2(a＋b)

i＝1, 2(26)

i＝1, 2(27)

i＝1, 2(28)

i＝1, 2(29)

It is easily seen that x＊i ＜ xoi ( x＊i ＞ xoi ) and pi ( x＊1 , x＊2 ) ＞ pi ( xo1, xo2 ) ( pi ( x＊1 , x＊2 ) ＜ pi ( xo1, xo2 ) ) in substitute(complementary) goods case.
3-2

Further Analysis
Let us assume that there are n goods. We denote the solution before merger by xo and the so-lution after merger by x＊.
(Definition 9)

Let us consider {M1, M2, ... , Mm} such thatm

∪M ＝{1, 2, ... , n}. Interpret ‘i∈M ’ as
s＝1

s

s

‘firm s produces good i’. We call {M1, M2, ... , Mm} an ‘industry configuration’ where m is the number offirms.
(Assumption 4)

The inverse demand function is (approximately) expressed in linear form by6

Inter-Industrial Integration: M&A with Related Goods in Demand

p＝Ax＋b in a relevant region of xo and x＊. Here b＝( b1, b2, ... , bn)T and
.....

a11

a 1n

.....

.....

.....

an1

.....

ann

A＝

(30)

with the condition that aii ＜ 0 for all i.
(Assumption 5)o

The marginal cost of each good is constant and non-negative in a relevant＊

region of x and x . We denote the constant marginal cost of good i by mci.
(Proposition 5)

Suppose there are n firms, firm i produces only good i ( i＝1,2, ..., n), they com-pete in quantity and any two goods are complementary according to both Definition 2 and 8. If someof n firms merge and consequently form an industry configuration {M1, M2, ..., Mm}, then x＊ ≥ xo andx＊ ≠ xo under Assumption 1, 4 and 5.
This proposition is proved as follows: the first order condition of profit maximization before
merger is
pio＋aii xio＝mci .
After merger, it is
p＊i ＋aii x＊i ＝mci

for non-merged firms,

and
j≠i

∑a x , 1 ≤ s ≤ m for merged firms.

p＊i ＋aii x＊i ＝mci－

j∈Ms

＊

ji j

Since goods i and j are complements ( i ≠ j), aij ＞ 0. Define

  

2a11

a12

...

a1n

a21

2a22

...

a2n

...

...

...

...

an1

an2

...

2ann

B≡

(31).

From the above first order conditions it follows that B ( x＊－xo ) ≤ 0 or －B ( x＊－xo) ≥ 0. Let A－1
be the inverse of A. Since －A－1 is a positive matrix by Definition 2, －A satisfies Hawkins-Simon’s
condition. This means that －B also satisfies the condition. Therefore equation －B ( x＊－xo) ≥ 0 has
non-negative solution i.e. x＊≥ xo. It is easily seen that x＊ ≠ xo.
Alternatively let us consider the following assumption.

(Assumption 6) For each i, εi≡

∂pi

xi

∂xi

pi

, ‘demand elasticity of price’, is constant in a relevant
7『経済研究』（明治学院大学）第 151 号

region.
(Proposition 6)

Suppose there are n firms, firm i produces only good i ( i＝1, 2, ... , n) and they

compete in quantity. If some of n firms merge, consequently form an industry configuration { M1, M2, ...

, Mm } and, for some s with 1 ≤ s ≤ m, Ms has more than one element and any two goods in Ms are complementary (substitute), then p＊i ＜ pio ( p＊i ＞ poi ) for i∈Ms under Assumption 1, 5 and 6.
Consider Ms which has more than one element. For i∈Ms, the first order condition of profit
maximization is∂pi∂xi

x oi ＋poi －mci＝(εi＋1) pio－mci＝0(32)

before merger. From this equation we know that εi ≥－1. The first order condition of profit maximization after merger is
∂pi
∂xi

j≠i

∂pj

j∈Ms

i

∑ ∂x x＊＊x＊
i ＋pi －mci＝(εi＋1) pi －mci＝－

＊

j

(33).

Right hand side of the above equation is negative (positive) in the complementary (substitute)
goods case. Since εi and mci are constant, it must be that mci ＞ 0 and εi ＞－1 in a relevant region. It
is easily seen that p＊i ＜ poi ( p＊i ＞ poi ) for i∈Ms in complements (substitutes) case. This proves Proposition 6.

4．Price Competition and Merger
4-1

Basic Analysis
Let us consider the following situation. There are 2 firms. Firm 1 produces good 1 and firm 2

produces good 2. Their strategies are prices. The first order condition for profit maximization of eachfirm isψi( p1, p2)＝xi＋( pi－MC i ) D ii＝0

i＝1, 2(34).

When they merge or collude, the first order condition of joint profit maximization is⎱―⎱―⎱

x1＋D 11 ( p1－MC 1)＋D 21 ( p2－MC 2)＝0

x2＋D 12 ( p1－MC 1)＋D 22 ( p2－MC 2)＝0(35).

Equation (35) proves that, in complementary goods case, it is impossible that all prices are lessthan or equal to their respective marginal costs. In substitutes case, each price can not be less thanthe marginal cost because the coefficients matrix of (35) satisfies Hawkins-Simon’s condition by Assumption 1.

8

Inter-Industrial Integration: M&A with Related Goods in Demand(Proposition 7)

When a firm produces two complementary goods, at least one price must ex-

ceed the marginal cost.
Many cases wherein pi ≤ MC i for some i correspond to two-part tariffs; this was first investigated by W. Oi［6］1971. These cases are caused by extraordinarily asymmetric demand structure.
We may exclude such asymmetric cases from our complementary goods analysis. Combining with
Proposition 7, however, the following assumption supports one more general proposition.
(Assumption 7)

Let ( po1, po2 ) denote the solution of equation (34) and ( p＊1 , p＊2 ) the solution ofequation (35). Prices are strategic substitute (see Definition 6) in a relevant region of ( po1, po2) and ( p＊1 , p＊2 )when the goods are complements in the region.
By Proposition 7, it must be that, in complementary goods case,ψi( p＊1 , p＊2 ) ＞ψi( po1, po2 )＝0

  

(36)

for some i. ψi is decreasing function of pi in a relevant region. By Assumption 7, it is impossible that
( p＊1 , p＊2 ) ≥ ( po1, po2 ).
(Proposition 8)

When two single-product firms’ products are complementary each other andthey compete in price, the merger or collusion between these two firms lowers at least one price under Assumption 7.
When we assume the stability condition of price competition i.e. following Assumption 8, thecorresponding result to Proposition 8 for substitute goods case is obtained.
(Assumption 8)
ψii ＜ 0,

(Proposition 9)

ψii ψjiψij ψjj＞ 0，i, j＝1, 2i≠jWhen two single-product firms’ products are substitute each other and they

compete in price, the merger or collusion between these two firms raise at least one price under Assumption 8.
This is because Jacobian of －ψi and its principal minors are positive by Assumption 8 and wehave the same argument as in the previous section using theorem 3 of Gale and Nikaido［4］1965.
The example in the previous section (equations (24) and (25)) has symmetric demand structure9『経済研究』（明治学院大学）第 151 号

and the following solutions in price competition case:
poi ＝
p＊i ＝

am－c

		

2a＋b

(a＋b) m－c		

2 (a＋b)D i( po1, po2 )＝a (am＋bm＋c)

D i( p＊1 , p＊2 )＝2a＋b(a＋b) m＋c2

i＝1, 2	(37)

i＝1, 2	(38)

i＝1, 2	(39)

i＝1, 2	(40)

It is easily seen that p＊i ＜ poi and D i ( p＊1 , p＊2 ) ＞ D i( po1, po2 ) in complementary goods case and theinequalities are inverted in substitute goods case.
4-2

Further Analysis
As we saw in the basic analysis, the case that the marginal cost exceeds the price of a good ofmulti-product firm is caused by such an extremely asymmetric structure in demand functions as
makes two-part tariffs profitable. Here we exclude the extreme case by the following assumption.
(Assumption 9)

At joint profit maximization, each price exceeds its corresponding marginal(Assumption 10)

For each i, price elasticity of demand i.e. ηi＝

cost.

tive in a relevant region.
(Proposition 10)

∂xi

pi

∂pi

xi

is constant and nega-

Suppose that there are n single-product firms, firm i produces good i ( i＝1,

2, … , n) and they compete in price, then some of them merge and form an industry configuration {M1,

M2, ... , Mm｝. If, for some s with 1 ≤ s ≤ m, Ms has more than one element and any two goods in Ms arecomplementary (substitute), then the prices of the goods in Ms lower (rise) under Assumption 2, 5, 9
and 10.
This proposition is proved as follows. Before merger, the first order condition for profit maximization is
xio＋

∂xi
∂pi

( pio－mci)＝0

After merger, the first order condition for profit maximization of merged firm is

10

(41).

Inter-Industrial Integration: M&A with Related Goods in Demand

xi＊＋

∂xi
∂pi

j≠i

∂xj

j∈Ms

i

∑ ∂p ( p －mc ) for i, j∈M( pi＊－mci)＝－

j

j

s

(42).

This is positive in complements case and negative in substitutes case by Assumption 9 . By
Assumptions 5 and 10, mci and ηi are constant. By Assumption 2, xio and x＊i are positive. Therefore
we can divide equation (41) by xio and (42) by x＊i . In complementary goods case, we have the following
inequality.
ηi (1－

mci＊pi) ＞ηi (1－

mci
pio

)

(43)

The inequality in (43) is inverted in substitute goods case. Therefore we obtain the result p＊i ＜poi ( p＊i ＞ poi ) for complements (substitutes) case.
(Proposition 11)

Consider the same situation as in Proposition 5 but let us assume that firms

compete in price and the demand functions are expressed by x＝Cp＋d in a relevant region wherec11
x＝Cp＋d, C＝ .....
cn1

.....

c 1n

d1

.....

.....

d＝ ︙ ．

.....

c nn

and

dn

If any two goods are substitute according to both Definition 2 and 8, then p＊≥ po and p＊ ≠ pounder Assumption 1, 5 and 9.
This is proven quite similarly as we have proved Proposition 5. Define D as follows.

D≡

2c11

c12

.....

c1n

c21

2c22

.....

c2n

.....

.....

.....

.....

cn1

cn2

.....

2cnn

Since cij ＞ 0 for i ≠ j, －C－1 is a positive matrix by Assumption 1 and Definition 8, and －C satisfies Hawkins-Simon’s condition. Therefore －D also satisfies the condition. We obtain －D ( p＊－po) ≥0 similarly as in the proof of Proposition 5. Therefore p＊≥ po and p＊ ≠ po.

5．Concluding Remark
We generalized classical results that consumer prices lower (rise) when firms with perfectly
complementary (substitute) goods merge or collude. That is, if firms with imperfectly complementary(substitute) goods merge or collude, consumer prices still tend to lower (rise). Joint profit maximization generally increase producer’s surplus and lower prices increase consumer’s surplus. Therefore
inter-industrial integration with complementary goods increases social welfare. We also showed the11『経済研究』（明治学院大学）第 151 号

limits of the present analysis by using general non-linear demand functions. So far, some of our assumptions appear still confining. We hope further investigation improves our analysis.

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［3］Economides, N., and Salop, S., 1992, Competition and Integration among Complements and Network Structure, Journal of Industrial Economics 40, 105-123.
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159, 81-93.
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Economics 85, 77-90.
［7］Takasaki, J., 1983, Inter-industrial Merger: The Case of Complementary Goods, Keizai Ronsou, Kyoto University, 132 (5・6) (Written in Japanese Language).
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