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 imply that Örms can reduce costs through either internal investment in building capital or through mergers. The model, which we solve computationally, allows Örms to invest or propose mergers according to the relative proÖtability 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 Önd that optimal policy can di§er substantially from what would be best considering only welfare in the period the merger is proposed. We also Önd that the ability to commit can lead to a signiÖcant welfare improvement. In general, Örmsíoptimal investment behavior can be greatly a§ected by the antitrust policy, and the optimal policy can in turn be greatly a§ected by Örmsíinvestment behavior.

Reference

Ben Mermelstein, Volker Nocke, Mark Satterthwaite, and Michael Whinston, “Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy”, July 2013.