IDEAS home Printed from https://ideas.repec.org/p/irv/wpaper/060701.html
   My bibliography  Save this paper

The Effects of Mergers with Dynamic Capacity Accumulation

Author

Listed:
  • 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.

Suggested Citation

  • Jiawei Chen, 2006. "The Effects of Mergers with Dynamic Capacity Accumulation," Working Papers 060701, University of California-Irvine, Department of Economics.
  • Handle: RePEc:irv:wpaper:060701
    as

    Download full text from publisher

    File URL: https://www.economics.uci.edu/files/docs/workingpapers/2006-07/Chen-01.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sheng-Ping Yang, 2002. "Identifying a dominant firm's market power among sellers of a homogeneous product: an application to Alcoa," Applied Economics, Taylor & Francis Journals, vol. 34(11), pages 1411-1419.
    2. David Besanko & Ulrich Doraszelski, 2004. "Capacity Dynamics and Endogenous Asymmetries in Firm Size," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 23-49, Spring.
    3. Ariel Pakes & Paul McGuire, 1994. "Computing Markov-Perfect Nash Equilibria: Numerical Implications of a Dynamic Differentiated Product Model," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 555-589, Winter.
    4. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    5. Levin, Dan, 1990. "Horizontal Mergers: The 50-Percent Benchmark," American Economic Review, American Economic Association, vol. 80(5), pages 1238-1245, December.
    6. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    7. Kwang Soo Cheong & Kenneth L Judd, 1997. "Mergers and Dynamic Oligopoly," Working Papers 199714, University of Hawaii at Manoa, Department of Economics.
    8. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
    9. Pesendorfer, Martin, 2003. " Horizontal Mergers in the Paper Industry," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 495-515, Autumn.
    10. Boccard, Nicolas & Wauthy, Xavier, 2000. "Bertrand competition and Cournot outcomes: further results," Economics Letters, Elsevier, vol. 68(3), pages 279-285, September.
    11. Berry, Steven & Pakes, Ariel, 1993. "Some Applications and Limitations of Recent Advances in Empirical Industrial Organization: Merger Analysis," American Economic Review, American Economic Association, vol. 83(2), pages 247-252, May.
    12. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-227, March.
    13. Reynolds, Stanley S, 1986. "Strategic Capital Investment in the American Aluminum Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 34(3), pages 225-245, March.
    14. Carlton, Dennis W & Gertner, Robert, 1989. "Market Power and Mergers in Durable-Good Industries," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages 203-226, October.
    15. Mueller,Dennis C., 2009. "Profits in the Long Run," Cambridge Books, Cambridge University Press, number 9780521101592, April.
    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.
    17. Werden, Gregory J & Froeb, Luke M, 1994. "The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy," Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(2), pages 407-426, October.
    18. Richard, Oliver, 2003. "Flight frequency and mergers in airline markets," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 907-922, June.
    19. Baldwin,John R. & Gorecki,Paul, 1998. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, number 9780521633574, March.
    20. Kwang-Soo Cheong, "undated". "Mergers and Dynamic Oligopoly," Computing in Economics and Finance 1997 126, Society for Computational Economics.
    21. Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
    22. Levy, David T & Reitzes, James D, 1992. "Anticompetitive Effects of Mergers in Markets with Localized Competition," Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(2), pages 427-440, April.
    23. Spence, Michael, 1976. "Product Differentiation and Welfare," American Economic Review, American Economic Association, vol. 66(2), pages 407-414, May.
    24. Froeb, Luke & Geweke, John, 1987. "Long run competition in the U.S. aluminum industry," International Journal of Industrial Organization, Elsevier, vol. 5(1), pages 67-78, March.
    25. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    26. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-258, March.
    27. McAfee, R Preston & Williams, Michael A, 1992. "Horizontal Mergers and Antitrust Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 181-187, June.
    28. Rosenbaum, David I., 1989. "An empirical test of the effect of excess capacity in price setting, capacity-constrained supergames," International Journal of Industrial Organization, Elsevier, vol. 7(2), pages 231-241, June.
    29. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
    30. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jiawei Chen & Ulrich Doraszelski & Joseph E. Harrington, Jr., 2009. "Avoiding market dominance: product compatibility in markets with network effects," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 455-485.
    2. repec:dau:papers:123456789/10217 is not listed on IDEAS
    3. Villeneuve, Bertrand & Zhang, Vanessa Yanhua, 2008. "A Case for Affirmative Action in Competition Policy," MPRA Paper 9700, University Library of Munich, Germany.
    4. Doraszelski, Ulrich & Escobar, Juan, 2016. "Protocol Invariance and the Timing of Decisions in Dynamic Games," CEPR Discussion Papers 11447, C.E.P.R. Discussion Papers.
    5. Wilson, Nathan E., 2012. "Uncertain regulatory timing and market dynamics," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 102-115.
    6. Satoshi Myojo & Hiroshi Ohashi, 2009. "Assessing the Consequences of a Horizontal Merger and its Remedies in a Dynamic Environment," CIRJE F-Series CIRJE-F-609, CIRJE, Faculty of Economics, University of Tokyo.
    7. Markus Dertwinkel-Kalt & Christian Wey, 2016. "Merger Remedies in Oligopoly under a Consumer Welfare Standard," Journal of Law, Economics, and Organization, Oxford University Press, vol. 32(1), pages 150-179.
    8. Zhao, Wei, 2013. "Estimating Dynamic Merger Effciencies with an Application to the 1997 Boeing-McDonnell Douglas Merger," MPRA Paper 63184, University Library of Munich, Germany, revised 11 Sep 2014.
    9. repec:bla:jindec:v:65:y:2017:i:3:p:623-653 is not listed on IDEAS

    More about this item

    Keywords

    Merger effects; Dynamic oligopoly; Capacity; Cost misspecification; Simulation;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:irv:wpaper:060701. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jennifer dos Santos). General contact details of provider: http://edirc.repec.org/data/deucius.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.