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

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

No 9943, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Antitrust; Commitment; Entry; investment; Merger (search for similar items in EconPapers)
JEL-codes: L13 L41 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-cmp and nep-com
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://cepr.org/publications/DP9943 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:9943

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP9943

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().