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Collaborate or Consolidate: Assessing the Competitive Effects of Production Joint Ventures

We analyze a symmetric joint venture in which firms facing external competition collaborate in input production. Under standard regularity conditions, the collaboration leads to higher profits than a horizontal merger, whereas the effect on prices and quantities depends on the form of downstream competition. When firms compete in prices, downstream prices for all firms are higher following a symmetric joint venture than following a merger. The reverse result may obtain under quantity competition. In light of our results regarding profits, we provide reasons why firms might still wish to merge: imperfect information, cost synergies, and organizational asymmetries.