Bargaining over managerial delegation contracts and merger incentives in an international oligopoly

This paper examines how the bargaining over the content of each firm's delegation contract influences the relation between the equilibrium market structure and the most preferred market structure from the view point of total social welfare in an international oligopoly under the segmented market assumption. We show that in sufficiently large areas of physical trade cost to export each firm's output and the manager's bargaining power relative to her/his owner, the duopoly structure with two international mergers that the highest total social welfare is achieved is observed in equilibrium. On the other hand, if both of them are sufficiently large, only the duopoly with two national mergers becomes the equilibrium market structure, though it simultaneously cannot become the most preferred market structure with respect to the total social welfare. These results indicate that in an international oligopoly with the segmented market hypothesis, the antitrust authorities pay attention to both the trade cost and the manager's bargaining power within each firm to prescribe an appropriate merger policy. In particular, the latter result implies that the necessity for an active merger policy increases.