Tuesday, December 25, 2018
Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy
Ben Mermelstein; Volker Nocke; Mark A. Satterthwaite; and Michael D. Whinston have an interesting paper on Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy.
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 for an antitrust authority who cannot commit to its future policy rule and approves or rejects mergers as they are proposed, considering both consumer value and aggregate value as its possible objectives. We find that the optimal policy can differ substantially from what would be best considering only welfare in the period the merger is proposed. 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. Moreover, externalities imposed by mergers on rivals can have significant effects on firms' investment incentives and thereby shape the optimal policy.