The Effects of Mergers with Dynamic Capacity Accumulation
AbstractWe investigate the price and welfare effects of mergers through simulations using a dynamic model of capacity accumulation in which firms produce near-homogeneous products and compete in prices. We find that mergers are welfare-reducing and that their long-run effects are worse than their short-run effects: in the long run average price increases further while total surplus and consumer surplus decrease further. A key feature of the model is that firms are ex ante identical but the industry evolves towards an asymmetric size distribution. If we instead fit the simulated data with an asymmetric costs model, which is a standard approach to explaining persistent asymmetries in market shares, we will systematically underestimate the long-run welfare-reducing effects of mergers, giving rise to misguided antitrust policies.
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Bibliographic InfoPaper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 060701.
Length: 38 pages
Date of creation: Mar 2006
Date of revision:
Merger effects; Dynamic oligopoly; Capacity; Cost misspecification; Simulation;
Other versions of this item:
- Chen, Jiawei, 2009. "The effects of mergers with dynamic capacity accumulation," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 92-109, January.
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-03 (All new papers)
- NEP-BEC-2006-09-03 (Business Economics)
- NEP-COM-2006-09-03 (Industrial Competition)
- NEP-IND-2006-09-03 (Industrial Organization)
- NEP-MIC-2006-09-03 (Microeconomics)
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