Private and Public Incentives for Mergers in the Face of Foreign Entry

We consider private and public incentives for domestic firms to merge in the face of foreign entry. We consider the gains to two merging firms and to national welfare in a linear Cournot model. With heterogeneous firms and possible synergies, greater foreign entry tends to enhance both private and public incentives for domestic mergers. Thus, policymakers have no cause to doubt the intentions of firms seeking to merge: when it is in the firms' interests then it is also in the public interest. However, at least for certain parameterisations, private gains from mergers become positive at a lower level of foreign entry than do public gains. This suggests that private firms may have an incentive to overstate the degree of foreign competition they anticipate facing—for example, after liberalizing foreign investment rules—to persuade policymakers that a proposed domestic merger is in the national interest.