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Mergers and the Evolution of Industry Concentration: Results from the Dominant-Firm Model

  • Gautam Gowrisankaran

    ()

    (Washington University in St. Louis, NBER)

  • Thomas J. Holmes

    ()

    (University of Minnesota, Federal Reserve Bank of Minneapolis, NBER)

To what extent will an industry in which mergers are feasible tend toward monopoly? We analyze this question using a dynamic dominant-firm model with rational agents, endogenous mergers, and constant returns to scale production. We find that long-run industry concentration depends upon the initial concentration. A monopolistic industry will remain monopolized and a perfectly competitive industry will remain perfectly competitive. For intermediate concentration levels, the dominant firm may acquire or sell capital, depending on its ability to commit to future behavior. Industry evolution also depends on the elasticities of demand and supply and the discount factor.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 35 (2004)
Issue (Month): 3 (Autumn)
Pages: 561-582

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Handle: RePEc:rje:randje:v:35:y:2004:3:p:561-582
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