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A jargon-filled way of making this point would be to talk about "internalizing pecuniary externalities" and then mumbling something about Coase.

A variation on this theme is the story of Disneyland/Disneyworld. Disney corp owns Disneyland, but not the land adjacent to it. Hence the area around Disneyland is filled with hotels, the market for hotels in the Anaheim area is competitive, and it's possible to get a hotel close to Disneyland at a reasonable rate. When Disney Corp built Disneyworld, they didn't want the same thing to happen again, so they built Disneyworld in what was, I think, a swamp in the middle of nowhere, and purchased all of the land for a long way around.

Disneyland: theme park with market power surrounded by hotels with little market power. Disneyworld: theme park market power leveraged into hotel market power..

Your post imagines a situation where Disneyworld has market power in theme park market, and there's another, entirely separate, corp that owns all of the land around Disneyworld and has market power in the hotel market. I think that kind of a situation seems counterintuitive precisely because, as you say, there's such a strong incentive for the two entities to merge to form one big firm, hence these kinds of situations are rarely observed in the real world.

Frances: "I think that kind of a situation seems counterintuitive precisely because, as you say, there's such a strong incentive for the two entities to merge to form one big firm, hence these kinds of situations are rarely observed in the real world."

Exactly! It's like all "origin" fables: the point of the fable is to explain why the "before" scenario is unlikely.

(Biggest flaw with my fable here is that transactions costs would also be an explanation for why shoes are sold in pairs. It's hard to get a perfectly matching pair of shoes if you order right and left separately. Your Disney example works better in that respect. But it's easier to do the math with my shoe example.)

QR = QL

This was not true before the merger. The buyer bought the shoes at different rate and quantities, the elasticities were different.

So a better look than price, or quantity is household inventory of shoes. Once we have a figure on household shelf cost, we can count the aggregate savings after the merger. I use transaction rate and quantity. The least elastic shoe, the right, comes four per purchase. The most elastic, the left, is one shoe per purchase.

Example: Normally I have two conditions in inventory, I have one pair of shoe in my closet, and my next transaction will buy a second pair, or I have two pairs, and I delay my next purchase. My closet holds 2 purchases, maximum, four shoes.

In the other case, I am buying one left shoe at a time and four right shoes, that would be a typical difference in elasticity. In my closet I will have either one or two left shoes, and either 1,2,3,4.5 right shoes. Because, if I have one left and one right, soon I will buy the next batch of four. So, using all the assumptions of the model (counting shelf costs is proportional to shoe costs), I need about twice the inventory space.

> This was not true before the merger. The buyer bought the shoes at different rate and quantities, the elasticities were different.

Not systematically. The representative agent has equal elasticities and quantities for left and right shoes.

A priori, left and right shoes see equal wear and suffer equal risk of loss or damage. So for an individual agent, the utility of a new single shoe is very low if it would make one's collection more lopsided, since having multiple left shoes (for example) but only one right shoe protects just against an unlikely coincidence of loss or damage.

Because the utility function has such a sharply discontinuous derivative at perfectly matched pairs, we can further expect this representative-agent truth to hold for most individual agents.

Majro: yep. The indifference curves are L-shaped.

It seems like this is similar to "double marginalization". Usually you see double marginalization in supply chains, like a monopolistic cobbler and a monopolistic shoelace maker. The moral is the same - the cooperative solution is more efficient for everyone.

CT: Yes. Alex Tabarrok on Twitter mentioned the "double marginalisation" problem. One slight difference though is that the two cobblers sell direct to the public. If the right cobbler sold right shoes to the left cobbler, who then sold pairs of shoes to the public, we would have bilateral monopoly/monopsony between the right and left cobblers.

I was thinking the same thing, Nick.

What if our society had a left leaning problem, they really did wear one shoe out faster than the other? Then we get intermediaries, distributors willig to run around and swap excess inventories for deficit inventories. We get, at an extra cost, a more granular flow of shoe with the additional step in distribution.

Nick,

This is pretty common once you notice the amount of "bundling" that happens. Eg. E.g. I can get internet + cable for $100 or just internet for $90 and cable TV for $50. If I get both internet access and my mobile access from Verizon, it's cheaper than getting each separately. I can get deals on hotel + airfare that are cheaper than individual hotel and airfare.

rsj: I think you're right. But in those particular examples there *may* be an alternative explanation. Because they are non-rival goods (except for the hotel and airfare example), so have zero marginal cost, so it may be a sorta price discrimination strategy? Like if there's an imperfect (or ideally negative) correlation between people's willingness to pay for the two goods, you can get more revenue by bundling them? (I remember studying the economics of "tied sales" ages ago, but my memory of this is very fuzzy.)

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