Private and public incentives for mergers in the face of foreign entry

This paper considers the private and public incentives for firms to merge in the face of foreign entry. We set up a standard linear Cournot model of competition within a country and consider the gains to two merging firms and to national welfare in a series of scenarios: homogeneous and heterogeneous firms with and without synergies from mergers. We look first at optimal domestic firm numbers from a social welfare perspective and then consider private and social incentives for mergers. With heterogeneous firms and when synergies can occur, greater foreign entry tends to enhance both private and public incentives for domestic mergers. These results suggest that 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, we also show that, at least for certain parameterisations, private gains from merger 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 liberalising foreign investment rules – to persuade policymakers that a proposed domestic merger is in the national interest.