On the Relationship between Tariff Levels and the Nature of Mergers

Abstract

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 tari¤ levels. Firms sell di¤erentiated products and compete in a Bertrand fashion in product markets. We …nd two e¤ects playing key roles in determining equilibrium market structure: the tari¤ saving e¤ ect and the protection gain e¤ ect. The balance between these two e¤ects implies that, when foreign country practices free trade, unilateral tari¤ reduction by a domestic country yields international mergers irrespective of the substitutability levels. By contrast, when foreign tari¤s are su¢ ciently 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 …nd that when bilateral tari¤s are su¢ ciently low, international mergers arise. These results …t 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.

Tariffs, R&D, and two merger policies

“…Status quo (no mergers): = {1,2,3,4} Triopoly with one national merger: = {12,3,4}; = {1,2,34} Triopoly with one international merger: = {13,2,4}; = {1,3,24}; = {14,2,3}; = {1,4,23} Symmetric national duopoly: = {12,34} Symmetric international duopoly: = {13,24}; = {14,23} Asymmetric international duopoly: = {1234}; = {2134}; = {3124}; = {4123} Monopoly: = {1234} We assume that monopoly is not allowed by the antitrust regulators. This assumption is also maintained in Horn and Persson (2001b) and Ulus and Yildiz (2012). 9…”

“…We assume that monopoly is not allowed by the antitrust regulators. This assumption is also maintained in Horn and Persson (2001b) and Ulus and Yildiz (2012). 9…”