Re: Merge Intel & Microsoft

Robin Hanson (
Fri, 01 Oct 1999 15:31:40 -0400

Robert Bradbury wrote:
> > Intel and Microsoft both seem to have strong near-
> > monopoly market power, and their products are clearly
> > strong complements. So the standard industrial
> > organization analysis would suggest that merging them
> > would produce lower prices *and* more profits for the
> > merged firm.
>... you may be speaking at an economics level most
>people don't have. ... only way I can interpret this statement
>is that if you mean that merging the two corporations makes
>a more efficient corporation by reducing management overhead
>... In short, I think you need to explain the case better so
>people can see what you see.

I wasn't trying to defend or explain the standard claim, just presuming that as in all conversations those who understand the topic might join in, and those who don't would stay out. We have conversations all the time here about topics many subscribers must be clueless about.

But in this case, I'll explain. Consider a product made of two parts, X,Y, such that there is no point in having one of the parts without the other (e.g. computer chip and OS). The quantity demanded D(P) of this product is therefore in terms of the price P of the two parts together. If the two parts are sold by separate monopolists, then P = PX + PY and each monopolist does something like

      max     (PX - CX) * D(PX + PY)

Where CX is the cost of making X. If the two firms are merged, then together they

      max    (P - CX - CY) * D(P)

This leads to both a lower price P, and more profits. QED.

Robin Hanson Asst. Prof. Economics, George Mason University MSN 1D3, Carow Hall, Fairfax VA 22030
703-993-2326 FAX: 703-993-2323