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Trade Liberalization and the Profitability of Domestic Mergers

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  • GAUDET, Gérard
  • KANOUNI, Rams

Abstract

It is often thought that a tariff reduction, by opening up the domestic market to foreign firms, should lessen the need for a policy aimed at discouraging domestic mergers. This implicitly assumes that the tariff in question is sufficiently high to prevent foreign firms from selling in the domestic market. However, not all tariffs are prohibitive, so that foreign firms may be present in the domestic market before it is abolished. Furthermore, even if the tariff is prohibitive, a merger of domestic firms may render it nonprohibitive, thus inviting foreign firms to penetrate the domestic market. In this paper, we show, using a simple example, that in the latter two cases, abolishing the tariff may in fact make the domestic merger more profitable. Hence, trade liberalization will not necessarily reduce the profitability of domestic mergers.

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File URL: http://hdl.handle.net/1866/367
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Bibliographic Info

Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2001-28.

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Length: 10 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:mtl:montde:2001-28

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Keywords: mergers; antitrust; free trade;

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References

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  1. Ross, Thomas W., 1988. "On the price effects of mergers with freer trade," International Journal of Industrial Organization, Elsevier, vol. 6(2), pages 233-246.
  2. Morton I. Kamien & Israel Zang, 1988. "The Limits of Monopolization Through Acquisition," Discussion Papers 802, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Long, Ngo Van & Vousden, Neil, 1995. "The Effects of Trade Liberalization on Cost-Reducing Horizontal Mergers," Review of International Economics, Wiley Blackwell, vol. 3(2), pages 141-55, June.
  4. Gaudet, Gerard & Salant, Stephen W, 1991. "Increasing the Profits of a Subset of Firms in Oligopoly Models with Strategic Substitutes," American Economic Review, American Economic Association, vol. 81(3), pages 658-65, June.
  5. Horn, H. & Levinsohn, J., 1998. "Merger Policies and Trade Liberalization," Working Papers 420, Research Seminar in International Economics, University of Michigan.
  6. David R. Collie, 2003. "Mergers and Trade Policy under Oligopoly," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 55-71, February.
  7. Rod Falvey, 1998. "Mergers in Open Economies," The World Economy, Wiley Blackwell, vol. 21(8), pages 1061-1076, November.
  8. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  9. Barros, Pedro P. & Cabral, Luis, 1994. "Merger policy in open economies," European Economic Review, Elsevier, vol. 38(5), pages 1041-1055, May.
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Citations

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Cited by:
  1. Stewart, Geoff & Chalkley, Martin, 2010. "International trade and the incentive for merger," Discussion Paper Series In Economics And Econometrics 79211, Economics Division, School of Social Sciences, University of Southampton.
  2. Martin Chalkley & Geoff Stewart, 2004. "Trade Liberalisation, Market Structure and the Incentive to Merge," Dundee Discussion Papers in Economics 174, Economic Studies, University of Dundee.
  3. Calmette, Marie-Françoise, 2007. "The Effects of Trade Liberalization Between High and Low Cost Countries when Merger Behavior is Endogenous," IDEI Working Papers 394, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Ray Chaudhuri, A. & Benchekroun, H., 2008. "Welfare Effect of Mergers and Trade Liberalization," Discussion Paper 2008-19, Tilburg University, Center for Economic Research.
  5. Ray Chaudhuri, A., 2008. "A Dynamic Model of Endogenous Mergers and Trade Liberalization," Discussion Paper 2008-005, Tilburg University, Tilburg Law and Economic Center.
  6. Kenji Fujiwara & Ngo Van Long, 2012. "Welfare Effects of Reducing Home Bias in Government Procurements: A Dynamic Contest Model," Review of Development Economics, Wiley Blackwell, vol. 16(1), pages 137-147, 02.

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