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Trade Liberalization and the Profitability of Mergers: a Global Analysis

Hassan Benchekroun () and Amrita Ray Chaudhuri ()

Review of International Economics, 2006, vol. 14, issue 5, 941-957

Abstract: We analyze the effects of bilateral tariff reductions on the profitability of cost-reducing horizontal mergers. Given Cournot competition in a two-country world, for any positive tariff below a certain threshold, marginal trade liberalization is shown to encourage only those domestic mergers with sufficiently large cost-savings and to discourage the rest. For tariffs close to, but smaller than, the prohibitive tariff, however, marginal trade liberalization necessarily encourages all domestic mergers. Moreover, we show that for a given level of cost-savings, the impact of marginal trade liberalization may not reliably predict that of nonmarginal liberalization. Although at high tariffs, domestic mergers are shown to be unambiguously more profitable than cross-border mergers, near free trade, mergers which yield the most cost-savings become the most profitable. Thus, when comparing domestic and cross-border mergers, trade liberalization encourages the type which yields the most cost-savings. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.

Date: 2006
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