The Effects of Government Policies on Market Structure in the Presence of Dynamic and Imperfect Competition

This dissertation studies the effects of various government policies on market structure in the presence of dynamic and imperfect competition. The first chapter studies the role of mergers and acquisitions in the long-run productivity growth. I estimate that about 30% of variation in M&A trade values is associated with the long-run productivity shocks. This finding suggests that restricting M&A without further analysis of its role in long-run growth might have unintended consequences on productivity growth. In the second chapter, I analyze the effects of corporate taxes on industrial concentration under income and cash flow taxation system in a dynamic game where firms interact strategically. My results suggest that if market is highly concentrated, then a shift from income towards cash flow taxation increases long-run market concentration. However, when market concentration is low such a shift has the opposite effect. When market concentration is low, short-run transitory dynamics from the shift is associated with a fall in market concentration and rise in consumer surplus at a cost of large subsidies. However, if market concentration is high, then the transition from income to cash flow taxation delivers higher consumer surplus and tax revenue at a cost of increase in market concentration in short run. In the last chapter, I study the properties of product differentiation in a two-stage duopoly game where a consumer’s quantity demanded depends on the product price and the transportation cost is paid for every unit of the product purchased. I show that in the industries where market size relative to transportation cost is large, the firms prefer locating as far away from each other as possible and hence maximize their market power. Second, when the relative magnitude is small, the firms locate closer to each other and engage in more fierce price competition, thus giving up some of their market power. This suggests that government policies that shrink/increase the market size will tend to decrease/increase the firms’ market power. Also, policies that increase the transportation cost of firms (such as emissions taxes in the case of the ready-mixed concrete industry) will tend to decrease the firms’ market power.