Template-Type: ReDIF-Paper 1.0
Title: Internal Versus External Growth in Industries With Scale Economies: A Computational Model of Optimal Merger Policy
Author-Name: Ben Mermelstein
Author-Email: 
Author-Name: Volker Nocke
Author-Email: volker.nocke@gmail.com
Author-Name: Mark A. Satterthwaite
Author-Email: 
Author-Name: Michael D. Whinston
Author-Email: 
Classification-JEL: L13, L40
Keywords: Horizontal merger, merger policy, investment, scale economies, antitrust

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 for an
antitrust authority who cannot commit to its future policy rule and approves
or rejects mergers as they are proposed, considering both consumer value and
aggregate value as its possible objectives. We find that the optimal policy
can differ substantially from what would be best considering only welfare in
the period the merger is proposed. 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.
Moreover, externalities imposed by mergers on rivals can have significant
effects on firms' investment incentives and thereby shape the optimal policy.

Note: 
Length: 37
Creation-Date: 2018-08
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp038
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2018_038