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Trade Liberalization and the Profitability of Domestic Mergers

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Author Info
GAUDET, Gérard
KANOUNI, Rams

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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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Publisher 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
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Handle: RePEc:mtl:montde:2001-28

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Related research
Keywords: mergers; antitrust; free trade;

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Find related papers by JEL classification:
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
G30 - Financial Economics - - Corporate Finance and Governance - - - General
K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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. [Downloadable!] (restricted)
  2. Long, Ngo Van & Vousden, Neil, 1995. "The Effects of Trade Liberalization on Cost-Reducing Horizontal Mergers," Review of International Economics, Blackwell Publishing, vol. 3(2), pages 141-55, June.
  3. 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. [Downloadable!] (restricted)
  4. Barros, Pedro P. & Cabral, Luis, 1994. "Merger policy in open economies," European Economic Review, Elsevier, vol. 38(5), pages 1041-1055, May. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Rod Falvey, 1998. "Mergers in Open Economies," The World Economy, Blackwell Publishing, vol. 21(8), pages 1061-1076, November. [Downloadable!] (restricted)
  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. David R. Collie, 2003. "Mergers and Trade Policy under Oligopoly," Review of International Economics, Blackwell Publishing, vol. 11(1), pages 55-71, February. [Downloadable!] (restricted)
  9. Kamien, Morton I & Zang, Israel, 1990. "The Limits of Monopolization through Acquisition," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 465-99, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ray Chaudhuri, A. & Benchekroun, H., 2008. "Welfare Effect of Mergers and Trade Liberalization," Discussion Paper 2008-009, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  2. Ray Chaudhuri, A., 2008. "A Dynamic Model of Endogenous Mergers and Trade Liberalization," Discussion Paper 2008-22, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  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. [Downloadable!]
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