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Do Mergers Lead to Monopoly in the Long Run? Results from the Dominant Firm Model

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  • Gautam Gowrisankaran
  • Thomas J. Holmes

Abstract

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.

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Date of creation: Sep 2002
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Handle: RePEc:nbr:nberwo:9151

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  1. Judd, Kenneth L. & Petersen, Bruce C., 1986. "Dynamic limit pricing and internal finance," Journal of Economic Theory, Elsevier, vol. 39(2), pages 368-399, August.
  2. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
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  5. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  6. Kwang-Soo Cheong, . "Mergers and Dynamic Oligopoly," Computing in Economics and Finance 1997 126, Society for Computational Economics.
  7. Gaskins, Darius Jr., 1971. "Dynamic limit pricing: Optimal pricing under threat of entry," Journal of Economic Theory, Elsevier, vol. 3(3), pages 306-322, September.
  8. Kwang Soo Cheong & Kenneth L Judd, 1997. "Mergers and Dynamic Oligopoly," Working Papers 199714, University of Hawaii at Manoa, Department of Economics.
  9. 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.
  10. Eric Maskin & Jean Tirole, 2010. "A Theory of Dynamic Oligopoly, 1: Overview and Quantity Competition with Large Fixed Costs," Levine's Working Paper Archive 397, David K. Levine.
  11. Holmes, Thomas J., 1996. "Can consumers benefit from a policy limiting the market share of a dominant firm?," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 365-387, May.
  12. Kydland, Finn, 1979. " A Dynamic Dominant Firm Model of Industry Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 81(3), pages 355-66.
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Cited by:
  1. Inés Macho-Stadler & David Pérez-Castrillo & Nicolás Porteiro, 2003. "Sequential Formation of Coalitions through Bilateral Agreements," Working Papers 84, Barcelona Graduate School of Economics.
  2. Inés Macho-Stadler & David Pérez-Castrillo & Nicolás Porteiro, 2006. "Sequential Formation of Coalitions Through Bilateral Agreements in a Cournot Setting," International Journal of Game Theory, Springer, vol. 34(2), pages 207-228, August.

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