Do Mergers Lead to Monopoly in the Long Run? Results from the Dominant Firm Model / Gautam Gowrisankaran, Thomas J. Holmes.

Format:

Book

Author/Creator:

Gowrisankaran, Gautam.

Contributor:

National Bureau of Economic Research.

Holmes, Thomas J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9151.

NBER working paper series no. w9151

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

Will an industry with no antitrust policy converge to monopoly, competition, or somewhere in between? We analyze this question using a dynamic dominant firm model with rational agents, endogenous mergers, and constant returns to scale production. We find that perfect competition and monopoly are always steady states of this model, and that there may be other steady states with a dominant firm and a fringe co-existing. Mergers are likely only when supply is inelastic or demand is elastic, suggesting that the ability of a dominant firm to raise price, through monopolization is limited. Additionally, as the discount factor increases, it becomes harder to monopolize the industry, because the dominant firm cannot commit to not raising prices in the future.

Notes:

Print version record

September 2002.