Will 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
9151.
Length: Date of creation: Sep 2002 Date of revision: Handle: RePEc:nbr:nberwo:9151
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Find related papers by JEL classification: H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
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Kenneth L. Judd & Bruce C. Petersen, 1984.
"Dynamic Limit Pricing and Internal Finance,"
Discussion Papers
603S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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