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The Effects of Mergers with Dynamic Capacity Accumulation

Jiawei Chen

No 60701, Working Papers from University of California-Irvine, Department of Economics

Abstract: We investigate the price and welfare effects of mergers through simulations using a dynamic model of capacity accumulation in which firms produce near-homogeneous products and compete in prices. We find that mergers are welfare-reducing and that their long-run effects are worse than their short-run effects: in the long run average price increases further while total surplus and consumer surplus decrease further. A key feature of the model is that firms are ex ante identical but the industry evolves towards an asymmetric size distribution. If we instead fit the simulated data with an asymmetric costs model, which is a standard approach to explaining persistent asymmetries in market shares, we will systematically underestimate the long-run welfare-reducing effects of mergers, giving rise to misguided antitrust policies.

Keywords: Merger effects; Dynamic oligopoly; Capacity; Cost misspecification; Simulation (search for similar items in EconPapers)
JEL-codes: C73 D24 L11 L41 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2006-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
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Journal Article: The effects of mergers with dynamic capacity accumulation (2009) Downloads
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