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A Dynamic Model of Endogenous Mergers and Trade Liberalization

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Author Info
Ray Chaudhuri, A. (Tilburg University, Center for Economic Research)

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Abstract

This paper uses a dynamic dominant-firm model with an endogenous merger process to examine the effects of trade liberalization on industry structure. Domestic and cross-border mergers and demergers are allowed for. When firms are myopic and the dominant firm has a sufficiently high pre-merger capital share in any one country, trade liberalization causes the industry to become significantly more concentrated. When firms are forward-looking, this anti-competitive effect of trade liberalization is mitigated. Tariff reduction from a prohibitive to a non-prohibitive level aligns merger patterns across countries and initiates merger (or demerger) waves simultaneously across countries, provided all firms are equally forward-looking. When the dominant firm is more forward-looking than the fringe, however, this result may be reversed. These results, thus, highlight the importance of taking into consideration existing industry structure and firms' discount rates whilst formulating competition policy in the face of trade liberalization.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-22.

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Date of creation: 2008
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Handle: RePEc:dgr:kubcen:200822

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Find related papers by JEL classification:
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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  7. Horn, Henrik & Levinsohn, James A, 2000. "Merger Policies And Trade Liberalization," CEPR Discussion Papers 2459, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March. [Downloadable!] (restricted)
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  18. Kamal Saggi & Halis Murat Yildiz, 2006. "On the International Linkages between Trade and Merger Policies," Review of International Economics, Blackwell Publishing, vol. 14(2), pages 212-225, 05. [Downloadable!] (restricted)
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  23. Keith Head & John Ries, 1997. "International Mergers and Welfare under Decentralized Competition Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1104-23, November. [Downloadable!] (restricted)
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