Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy
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.
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. We thank John Asker, Dennis Carlton, Alan Collard-Wexler, Uli Doraszelski, Gautam Gowrisankaran, Ariel Pakes and Patrick Rey for their comments, as well as seminar audiences at Bates White, Chicago, ECARES, Harvard, NYU, Penn, Stanford, Toulouse, UCLA, the 2012 Northwestern Searle Antitrust conference, the 2012 SciencesPo Workshop on Dynamic Models in IO, the 2013 CRESSE Conference, the 2013 NBER IO Summer Institute, the 2013 EARIE conference, the 2013 SFB-TR15 Meeting, and the 2013 Annual Meeting of the IO section of the German Economic Association. Mermelstein and Satterthwaite thank the General Motors Research Center for Strategy and Management at Northwestern University's Kellogg School of Management for financial support. Nocke gratefully acknowledges financial support from the European Research Council (ERC Starting Grant 313623). Whinston thanks the National Science Foundation and the Toulouse Network for Information Technology for financial support. Note: General Motors provided an endowment for the Center about 1980 and exercises no control over the research that the Center supports.
Nocke is a member of the Panel of Academic Advisors to the UK Competition Commission, and a member of the Economic Advisory Group on Competition Policy at the European Commission's Directorate General for Competition.Michael D. Whinston
I am a partner at the consulting firm Bates White LLC.
Ben Mermelstein & Volker Nocke & Mark A. Satterthwaite & Michael D. Whinston, 2020. "Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy," Journal of Political Economy, vol 128(1), pages 301-341.