Do Mergers Lead to Monopoly in the Long Run? Results from the Dominant Firm Model
AbstractWill an industry with no antitrust policy converge to monopoly, competition, or somewhere in between? We analyze this question using a dynamic dominant firm model with rational agents, endogenous mergers, and constant returns to scale production. We find that perfect competition and monopoly are always steady states of this model, and that there may be other steady states with a dominant firm and a fringe co-existing. Mergers are likely only when supply is inelastic or demand is elastic, suggesting that the ability of a dominant firm to raise price, through monopolization is limited. Additionally, as the discount factor increases, it becomes harder to monopolize the industry, because the dominant firm cannot commit to not raising prices in the future.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9151.
Date of creation: Sep 2002
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Publication status: published as Gowrisankaran, Gautam and Thomas J. Holmes. "Mergers And The Evolution Of Industry Concentration: Results From The Dominant-Firm Model," Rand Journal of Economics, 2004, v35(3,Autumn), 561-582.
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- Gautam Gowrisankaran & Thomas J. Holmes, 2000. "Do mergers lead to monopoly in the long run? Results from the dominant firm model," Staff Report 264, Federal Reserve Bank of Minneapolis.
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-09-11 (All new papers)
- NEP-ENT-2002-08-29 (Entrepreneurship)
- NEP-MIC-2002-10-07 (Microeconomics)
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