Mergers and the Evolution of Industry Concentration: Results from the Dominant-Firm Model

Gautam Gowrisankaran () and Thomas Holmes ()
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Gautam Gowrisankaran: Washington University in St. Louis, NBER

RAND Journal of Economics, 2004, vol. 35, issue 3, 561-582

Abstract: To what extent will an industry in which mergers are feasible tend toward monopoly? We analyze this question using a dynamic dominant-firm model with rational agents, endogenous mergers, and constant returns to scale production. We find that long-run industry concentration depends upon the initial concentration. A monopolistic industry will remain monopolized and a perfectly competitive industry will remain perfectly competitive. For intermediate concentration levels, the dominant firm may acquire or sell capital, depending on its ability to commit to future behavior. Industry evolution also depends on the elasticities of demand and supply and the discount factor.

Date: 2004
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