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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.

Suggested Citation

  • Gautam Gowrisankaran & Thomas J. Holmes, 2002. "Do Mergers Lead to Monopoly in the Long Run? Results from the Dominant Firm Model," NBER Working Papers 9151, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9151
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    References listed on IDEAS

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    Cited by:

    1. Snellman, Heli, 2006. "Automated teller machine network market structure and cash usage," Scientific Monographs, Bank of Finland, number 2006_038.
    2. Snellman, Heli, 2006. "Automated teller machine network market structure and cash usage," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number sm2006_038, March.
    3. repec:zbw:bofism:2006_038 is not listed on IDEAS
    4. Inés Macho-Stadler & David Pérez-Castrillo & Nicol? Porteiro, 2002. "Sequential Formation of Coalitions through Bilateral Agreements," UFAE and IAE Working Papers 515.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    5. Atallah, Gamal, 2007. "Monopolization through endogenous vertical mergers," Research in Economics, Elsevier, vol. 61(2), pages 99-104, June.
    6. 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;Game Theory Society, vol. 34(2), pages 207-228, August.

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    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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