Working Paper: CEPR ID: DP9943
Authors: Ben Mermelstein; Volker Nocke; Mark Satterthwaite; Michael Whinston
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 when the antitrust authority can commit to a policy rule and when it cannot commit, and consider both consumer value and aggregate value as possible objectives of the antitrust authority. We find that optimal policy can differ substantially from what would be best considering only welfare in the period the merger is proposed. We also find that the ability to commit can lead to a significant welfare improvement. 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.
Keywords: antitrust; commitment; entry; investment; merger
JEL Codes: L13; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Antitrust authority can commit to merger policy (L49) | Improves welfare significantly (D69) |
| Antitrust authority can commit to merger policy (L49) | Better investment behavior among firms (G40) |
| Better investment behavior among firms (G40) | Prevents inefficient entry-for-buyout strategies (L14) |
| Optimal merger policy (L21) | Significantly affects firms' investment behavior (H32) |
| Firms' investment behavior (D22) | Influences overall market dynamics (F61) |
| Optimal merger policy (L21) | Influences welfare outcomes (I38) |
| Allowing mergers (G34) | Reduction in consumer surplus (D11) |
| Allowing mergers (G34) | Increase in aggregate surplus under certain conditions (D69) |
| Merger policy (G34) | Alters firms' investment incentives (H32) |
| Merger policy (L49) | Implications for long-term market structure (D49) |