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The Effects of Mergers with Dynamic Capacity Accumulation

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Author Info
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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Publisher 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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Postal: Irvine, CA 92697-3125
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Related research
Keywords: Merger effects; Dynamic oligopoly; Capacity; Cost misspecification; Simulation;

Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor 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

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  6. Kwang-Soo Cheong, . "Mergers and Dynamic Oligopoly," Computing in Economics and Finance 1997 126, Society for Computational Economics.
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  14. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March. [Downloadable!] (restricted)
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    Other versions:
  16. Dalkir, Serdar & Logan, John W. & Masson, Robert T., 2000. "Mergers in symmetric and asymmetric noncooperative auction markets: the effects on prices and efficiency," International Journal of Industrial Organization, Elsevier, vol. 18(3), pages 383-413, April. [Downloadable!] (restricted)
  17. Richard, Oliver, 2003. "Flight frequency and mergers in airline markets," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 907-922, June. [Downloadable!] (restricted)
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    Other versions:
  22. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn. [Downloadable!] (restricted)
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