Working Paper: NBER ID: w9151
Authors: Gautam Gowrisankaran; Thomas J. Holmes
Abstract: 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.
Keywords: mergers; monopoly; competition; dynamic dominant firm model
JEL Codes: L1; L4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market elasticity (D12) | merger likelihood (G34) |
| inelastic supply or elastic demand (D12) | merger likelihood (G34) |
| discount factor (H43) | monopolization difficulty (L12) |
| mergers (G34) | market dynamics (D49) |