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The Effects of Mergers with Dynamic Capacity Accumulation

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  • Jiawei Chen

    (Department of Economics, University of California-Irvine)

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.

Suggested Citation

  • Jiawei Chen, 2006. "The Effects of Mergers with Dynamic Capacity Accumulation," Working Papers 060701, University of California-Irvine, Department of Economics.
    • Handle: RePEc:irv:wpaper:060701
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    Cited by:

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    2. Brett Hollenbeck, 2020. "Horizontal mergers and innovation in concentrated industries," Quantitative Marketing and Economics (QME), Springer, vol. 18(1), pages 1-37, March.
    3. Jiawei Chen & Ulrich Doraszelski & Joseph E. Harrington, Jr., 2009. "Avoiding market dominance: product compatibility in markets with network effects," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 455-485, September.
    4. repec:dau:papers:123456789/10217 is not listed on IDEAS
    5. Villeneuve, Bertrand & Zhang, Vanessa Yanhua, 2008. "A Case for Affirmative Action in Competition Policy," MPRA Paper 9700, University Library of Munich, Germany.
    6. Doraszelski, Ulrich & Escobar, Juan F., 2019. "Protocol invariance and the timing of decisions in dynamic games," Theoretical Economics, Econometric Society, vol. 14(2), May.
    7. Wilson, Nathan E., 2012. "Uncertain regulatory timing and market dynamics," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 102-115.
    8. Bertrand Villeneuve & Vanessa Yanhua Zhang, 2013. "Industry Restructuring: A Case for Affirmative Action," Annals of Economics and Statistics, GENES, issue 109-110, pages 179-201.
    9. Satoshi Myojo & Hiroshi Ohashi, 2009. "Assessing the Consequences of a Horizontal Merger and its Remedies in a Dynamic Environment," CIRJE F-Series CIRJE-F-609, CIRJE, Faculty of Economics, University of Tokyo.
    10. Markus Dertwinkel-Kalt & Christian Wey, 2016. "Merger Remedies in Oligopoly under a Consumer Welfare Standard," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 32(1), pages 150-179.
    11. FUKASAWA Takeshi & OHASHI Hiroshi, 2023. "Long-run Effect of a Horizontal Merger and Its Remedial Standards," Discussion papers 23001, Research Institute of Economy, Trade and Industry (RIETI).
    12. Daniel Greenfield & Jeremy A. Sandford, 2021. "Upward pricing pressure in mergers of capacity‐constrained firms," Economic Inquiry, Western Economic Association International, vol. 59(4), pages 1723-1747, October.
    13. Zhao, Wei, 2013. "Estimating Dynamic Merger Effciencies with an Application to the 1997 Boeing-McDonnell Douglas Merger," MPRA Paper 63184, University Library of Munich, Germany, revised 11 Sep 2014.
    14. Johannes Paha, 2017. "The Value of Collusion with Endogenous Capacity and Demand Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 65(3), pages 623-653, September.

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    More about this item

    Keywords

    Merger effects; Dynamic oligopoly; Capacity; Cost misspecification; Simulation;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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