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

Ben Mermelstein, Volker Nocke, Mark A. Satterthwaite and Michael Whinston

No 20051, NBER Working Papers from National Bureau of Economic Research, Inc

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 building 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 ability 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.

JEL-codes: L40 L41 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-cmp and nep-com
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Published as Ben Mermelstein & Volker Nocke & Mark A. Satterthwaite & Michael D. Whinston, 2020. "Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy," Journal of Political Economy, vol 128(1), pages 301-341.

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Related works:
Journal Article: Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy (2020)
Working Paper: Internal Versus External Growth in Industries With Scale Economies: A Computational Model of Optimal Merger Policy (2018)
Working Paper: Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy (2014)
Working Paper: Internal versus external growth in industries with scale economies: A computational model of optimal merger policy (2014)
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