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On the relationship between tariff levels and the nature of mergers

  • Yildiz, Halis Murat
  • Ulus, Aysegul

This paper employs an endogenous merger formation approach in a two-country oligopoly model of trade to examine the international linkages between the nature of mergers and tariff levels. Firms sell differentiated products and compete in a Bertrand fashion in product markets. We find two effects playing key roles in determining equilibrium market structure: the tariff saving effect and the protection gain effect. The balance between these two effects implies that, when foreign country practices free trade, unilateral tariff reduction by a domestic country yields international mergers irrespective of the substitutability levels. By contrast, when foreign tariffs are sufficiently high and products are close substitutes, national mergers obtain in the equilibrium. Therefore, the implications of unilateral trade liberalization on the equilibrium market structure depends on the trade regime in foreign country especially when products are close substitutes. Unlike this asymmetric result of unilateral trade liberalization, we find that when bilateral tariffs are sufficiently low, international mergers arise. These results fit well with the fact that global trade liberalization has been accompanied by an increase in international merger activities. Finally, from a welfare perspective, we show that international mergers are preferable to national mergers and thus social and private merger incentives become aligned together as trade gets bilaterally liberalized.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35021.

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Date of creation: 03 Jul 2011
Date of revision:
Handle: RePEc:pra:mprapa:35021
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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. Levin, D., 1988. "Horizontal Mergers: The 50 Percent Bench-Mark," Papers 19, Houston - Department of Economics.
  3. Persson, Lars & Horn, Henrik, 1998. "Endogenous Mergers in Concentrated Markets," Working Paper Series 513, Research Institute of Industrial Economics.
  4. James R. Markusen & Anthony J. Venables, 1995. "Multinational Firms and The New Trade Theory," NBER Working Papers 5036, National Bureau of Economic Research, Inc.
  5. Ray, D. & Vohra, R., 1996. "A Theory of Endogenous Coalition Structure," Papers 68, Boston University - Industry Studies Programme.
  6. Dockner, Engelbert J. & Gaunersdorfer, Andrea, 2001. "On the profitability of horizontal mergers in industries with dynamic competition," Japan and the World Economy, Elsevier, vol. 13(3), pages 195-216, August.
  7. Keith Head & John Ries, 1997. "International Mergers and Welfare under Decentralized Competition Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1104-23, November.
  8. Joao Ricardo Faria & Halis Murat Yildiz, 2005. "Trade Liberalization, Nature of Mergers and Employment," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 14(1), pages 43-63.
  9. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
  10. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
  11. Norbäck, Pehr-Johan & Persson, Lars, 2003. "Privatization Policy in an International Oligopoly," Working Paper Series 608, Research Institute of Industrial Economics.
  12. Norbäck, Pehr-Johan & Persson, Lars, 2001. "Privatization and Foreign Competition," CEPR Discussion Papers 2735, C.E.P.R. Discussion Papers.
  13. Horn, Henrik & Persson, Lars, 1999. "The Equilibrium Ownership of an International Oligopoly," CEPR Discussion Papers 2302, C.E.P.R. Discussion Papers.
  14. Horstmann, Ignatius J. & Markusen, James R., 1992. "Endogenous market structures in international trade (natura facit saltum)," Journal of International Economics, Elsevier, vol. 32(1-2), pages 109-129, February.
  15. Bjorvatn, Kjetil, 2004. "Economic integration and the profitability of cross-border mergers and acquisitions," European Economic Review, Elsevier, vol. 48(6), pages 1211-1226, December.
  16. Richardson, Martin, 1999. "Trade and Competition Policies: Concordia Discors?," Oxford Economic Papers, Oxford University Press, vol. 51(4), pages 649-64, October.
  17. Qiu, Larry D. & Zhou, Wen, 2006. "International mergers: Incentives and welfare," Journal of International Economics, Elsevier, vol. 68(1), pages 38-58, January.
  18. Barros, Pedro P. & Cabral, Luis, 1994. "Merger policy in open economies," European Economic Review, Elsevier, vol. 38(5), pages 1041-1055, May.
  19. Hassan Benchekroun, 2003. "The closed-loop effect and the profitability of horizontal mergers," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 546-565, August.
  20. repec:oup:qjecon:v:98:y:1983:i:2:p:185-99 is not listed on IDEAS
  21. repec:oup:restud:v:60:y:1993:i:2:p:463-77 is not listed on IDEAS
  22. David R. Collie, 2003. "Mergers and Trade Policy under Oligopoly," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 55-71, February.
  23. repec:oup:qjecon:v:105:y:1990:i:2:p:465-99 is not listed on IDEAS
  24. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  25. Cheung, Francis K., 1992. "Two remarks on the equilibrium analysis of horizontal merger," Economics Letters, Elsevier, vol. 40(1), pages 119-123, September.
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