Mergers and Acquisitions and the Aggregate Markup

In the U.S., the measured markup has been increasing since the 1980s. This paper analyzes the impact of the mergers and acquisitions (M&As) market on aggregate markup. We first provide empirical evidence that a firm's markup—measured as the difference between its price and marginal cost—increases after an M&A transaction. We then propose a dynamic general equilibrium model with heterogeneous firms and endogenous M&As to explore the aggregate implications of M&As under different antitrust policy regimes. In this model, firms are endowed with a productivity, and more productive firms have a larger size and a higher markup. An M&A is modeled as a search and matching process. The successful purchase of other firms increasesthe size of the acquirer, while also increasing its markup. Under our calibration, the increasing M&A market due to more lenient antitrust policies accounts for about 73% of the 5 percentage-point increase in aggregate markup from 1981-85 to 2011-15