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The Effects of Mergers with Dynamic Capacity Accumulation

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  • Jiawei Chen

    ()
    (Department of Economics, University of California-Irvine)

Abstract

We 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 Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 060701.

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Length: 38 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:irv:wpaper:060701

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Keywords: Merger effects; Dynamic oligopoly; Capacity; Cost misspecification; Simulation;

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Citations

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Cited by:
  1. Jiawei Chen & Ulrich Doraszelski & Joseph E. Harrington, Jr., 2009. "Avoiding market dominance: product compatibility in markets with network effects," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 455-485.
  2. Bertrand VILLENEUVE & Vanessa Yanhua ZHANG, 2013. "Industry Restructuring : A Case for Affirmative Action," Annales d'Economie et de Statistique, ENSAE, issue 109-110, pages 8.
  3. Wilson, Nathan E., 2012. "Uncertain regulatory timing and market dynamics," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 102-115.
  4. Villeneuve, Bertrand & Zhang, Vanessa Yanhua, 2008. "A Case for Affirmative Action in Competition Policy," MPRA Paper 9700, University Library of Munich, Germany.

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