The Effects of Trade Liberalization Between Heterogeneous Countries on Endogenous Mergers

Marie-Françoise Dumay-Calmette
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Marie-Françoise Dumay-Calmette: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: This paper examines the effects of trade liberalization on merger behavior. We endogenize merger choice among owners in an oligopolistic industry in asymmetric countries to analyze the consequences of trade cost reductions on competitiveness and welfare. In this context, the non-cooperative game supports asymmetric market structures. We also find that trade liberalization is not necessarily pro-competitive in countries with the competitive advantage, even if trade costs are completely abolished. Moreover, the tariff-jumping explanation of international mergers does not necessarily apply. The welfare analysis shows that merger behavior can significantly alter any gains from liberalization. Countries should consider enforcing competition in regional agreements. Specifically, to avoid a reduction in domestic welfare following trade-liberalizing reductions in trade costs, a high-cost country's optimal policy may be to ban international mergers.

Date: 2008-11
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Published in Review of International Economics, 2008, 16 (5), pp.874-892. ⟨10.1111/j.1467-9396.2008.00755.x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04411356

DOI: 10.1111/j.1467-9396.2008.00755.x

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