NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Do Mergers Lead to Monopoly in the Long Run? Results from the Dominant Firm Model

Gautam Gowrisankaran, Thomas J. Holmes

NBER Working Paper No. 9151
Issued in September 2002
NBER Program(s):   IO

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.

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Document Object Identifier (DOI): 10.3386/w9151

Published: Gowrisankaran, Gautam and Thomas J. Holmes. "Mergers And The Evolution Of Industry Concentration: Results From The Dominant-Firm Model," Rand Journal of Economics, 2004, v35(3,Autumn), 561-582.

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