Journal of Political Economy Vol. 128 No. 1 2020

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

Ben Mermelstein¹; Volker Nocke^2,3; Mark A. Satterthwaite⁴; Michael D. Whinston^5,6

¹ Bates White · ² Center for Economic and Policy Research · ³ University of Mannheim · ⁴ Northwestern University · ⁵ National Bureau of Economic Research · ⁶ Massachusetts Institute of Technology

Abstract

We study merger policy in a dynamic computational model in which firms can reduce costs through investment or through mergers. Firms invest or propose mergers according to the profitability of these strategies. An antitrust authority can block mergers at some cost. We examine the optimal policy for an antitrust authority that cannot commit to its future policy and approves mergers as they are proposed. We find that the optimal policy can differ substantially from a policy based on static welfare. In general, antitrust policy can greatly affect firms’ investment behavior, and firms’ investment behavior can greatly affect the optimal antitrust policy.

DOI

10.1086/704069

Volume

128

Issue

1

Pages

301-341

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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