Do Mergers Lead to Monopoly in the Long Run? Results from the Dominant Firm Model
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.
|Date of creation:||Sep 2002|
|Date of revision:|
|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.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shleifer, Andrei & Vishny, Robert W, 1986.
"Large Shareholders and Corporate Control,"
Journal of Political Economy,
University of Chicago Press, vol. 94(3), pages 461-88, June.
- Kwang-Soo Cheong, . "Mergers and Dynamic Oligopoly," Computing in Economics and Finance 1997 126, Society for Computational Economics.
- Morton I. Kamien & Israel Zang, 1988.
"The Limits of Monopolization Through Acquisition,"
802, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- Dixit, Avinash, 1979.
"The Role of Investment in Entry-Deterrence,"
The Warwick Economics Research Paper Series (TWERPS)
140, University of Warwick, Department of Economics.
- Kenneth L. Judd & Bruce C. Petersen, 1984.
"Dynamic Limit Pricing and Internal Finance,"
603S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- Kwang Soo Cheong & Kenneth L Judd, 1997. "Mergers and Dynamic Oligopoly," Working Papers 199714, University of Hawaii at Manoa, Department of Economics.
- Maskin, Eric & Tirole, Jean, 1988.
"A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs,"
Econometric Society, vol. 56(3), pages 549-69, May.
- J. Tirole & E. Maskin, 1982. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large-Fixed Costs," Working papers 320, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- 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.
- Kydland, Finn, 1979. " A Dynamic Dominant Firm Model of Industry Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 81(3), pages 355-66.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9151. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.