Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy


Mermelstein, Ben ; Nocke, Volker ; Satterthwaite, Mark A. ; Whinston, Michael D.


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URL: https://ub-madoc.bib.uni-mannheim.de/35958
URN: urn:nbn:de:bsz:180-madoc-359587
Document Type: Working paper
Year of publication: 2014
The title of a journal, publication series: Working Paper Series
Volume: 14-10
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > VWL, Mikroökonomik (Nocke)
MADOC publication series: Department of Economics > Working Paper Series
Subject: 330 Economics
Classification: JEL: L41 , L13,
Keywords (English): Merger Policy , Antitrust , Investment , Entry , Commitment
Abstract: We study optimal merger policy in a dynamic model in which the presence of scale economies implies that firms can reduce costs through either internal investment in build- ing capital or through mergers. The model, which we solve computationally, allows firms to invest or propose mergers according to the relative profitability of these strategies. An antitrust authority is able to block mergers at some cost. We examine the optimal policy when the antitrust authority can commit to a policy rule and when it cannot commit, and consider both consumer value and aggregate value as possible objectives of the antitrust authority. We find that optimal policy can differ substantially from what would be best considering only welfare in the period the merger is proposed. We also find that the abil- ity to commit can lead to a significant welfare improvement. In general, antitrust policy can greatly affect firms` optimal investment behavior, and firms` investment behavior can in turn greatly affect the antitrust authority`s optimal policy.

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