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.

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 D. Whinston

Journal of Political Economy, 2020, vol. 128, issue 1, 301 - 341

Abstract: We study merger policy in a dynamic computational model in which firms can reduce costs through investment or through mergers. Firms invest or propose mergers according to the profitability of these strategies. An antitrust authority can block mergers at some cost. We examine the optimal policy for an antitrust authority that cannot commit to its future policy and approves mergers as they are proposed. We find that the optimal policy can differ substantially from a policy based on static welfare. In general, antitrust policy can greatly affect firms’ investment behavior, and firms’ investment behavior can greatly affect the optimal antitrust policy.

Date: 2020
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