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Cross-Border Price Effects of Mergers and Acquisitions -- A Quantitative Framework for Competition Policy

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  • Breinlich, Holger
  • Nocke, Volker
  • Schutz, Nicolas

Abstract

Decisions of national competition authorities have important effects on other jurisdictions. We provide a framework to quantify the domestic and cross-border effects of mergers, and to draw conclusions for the coordination of national merger policies. We develop a two-country model with many sectors. In each sector, producers vary in terms of their marginal costs, and are engaged in Cournot competition. We allow for profitable mergers to take place subject to the non-violation of a given national competition policy. Because of trade costs and perceived differences in qualities between domestic and foreign products, mergers may have different consumer surplus effects in the home and the foreign country. We calibrate the model using data for the year 2002 for 167 manufacturing sectors in the U.S. and Canada. We choose parameters to match relevant moments in the data, including industry sales, concentration ratios and trade flows. We find that in the majority of industries a merger approval policy based on domestic consumer surplus is too restrictive from the viewpoint of the neighboring country. We also show that adopting a supra-national policy that approves a merger if and only if it increases the sum of consumer surplus in the two countries would lead to significant gains for U.S. consumers but hurt consumers in Canada. These results highlight the difficulties in coordinating national competition policies in a way acceptable to all participating countries. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79837.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79837

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Web page: http://www.socialpolitik.org/
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  1. Horn, H. & Levinsohn, J., 1998. "Merger Policies and Trade Liberalization," Working Papers 420, Research Seminar in International Economics, University of Michigan.
  2. Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
  3. Martin Pesendorfer, 2005. "Mergers Under Entry," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 661-679, Autumn.
  4. Holger Breinlich, 2006. "Trade Liberalization and Industrial Restructuring through Mergers and Acquisitions," CEP Discussion Papers dp0717, Centre for Economic Performance, LSE.
  5. Neary, J. Peter, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," Center for European, Governance and Economic Development Research Discussion Papers 34, University of Goettingen, Department of Economics.
  6. di Giovanni, Julian, 2005. "What drives capital flows? The case of cross-border M&A activity and financial deepening," Journal of International Economics, Elsevier, vol. 65(1), pages 127-149, January.
  7. 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.
  8. Jehiel, Philippe & Moldovanu, Benny, 1995. "Negative Externalities May Cause Delay in Negotiation," Econometrica, Econometric Society, vol. 63(6), pages 1321-35, November.
  9. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
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Cited by:
  1. Ray Chaudhuri, A., 2014. "Acquisitions by Multinationals and Trade Liberalization," Discussion Paper 2014-006, Tilburg University, Center for Economic Research.

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