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Shore Capital's banking analyst Gary Greenwood said: "TSB will be painted as a new challenger brand on the high street but I doubt that its pricing is going to be very differentiated to competitors.
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Finally, when composite goods are very differentiated, no market failure arises as any proposed (V) merger will be cleared.
For instance, outsiders' composite good is sold at a lower price if composite goods are not very differentiated, but it can be sold at a higher price if products are very differentiated and there are large differences in quality.
The Cournot effect is capitalizing this effect as it is larger than the competition effect when composite goods are very differentiated.
As the diversion ratio is decreasing in the degree of differentiation, a lower synergy would be required to clear a horizontal merger when composite goods are very differentiated.
Similarly, mix-and-match composite good prices can be reduced instead of increase their price when products are very differentiated and large differences in quality.
Interestingly, the incentive to merge is always positive and increasing with (n) only if products are very differentiated, otherwise this incentive is decreasing.
If (frac{gamma }{beta } ) is close to zero composite goods are very differentiated and competition is not intense, thus the merged firm prefers to fully control one composite good through a vertical merger.
Focusing only on strategic reasons, vertical mergers arise at equilibrium only when composite goods are very differentiated or when the number of producers is large while horizontal mergers arise otherwise.
The effect of a (VH) merger is to improve welfare and consumer surplus with respect to either the initial situation or with respect to a (H) merger if composite products are very differentiated.
Finally industry profits after the merger might decrease if composite goods are very differentiated since losses in different-type outsiders offset gains by the merged entity and same-type outsiders.
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