A Dynamic Model of Endogenous Mergers and Trade Liberalization

CentER Discussion Paper No. 2008-22

TILEC Discussion Paper No. 2008-005

38 Pages Posted: 20 Feb 2008

See all articles by Amrita Ray Chaudhuri

Amrita Ray Chaudhuri

University of Winnipeg - Department of Economics; Tilburg University - Tilburg University School of Economics and Management; Tilburg Law and Economics Center (TILEC)

Date Written: February 2008

Abstract

This paper uses a dynamic dominant-firm model with an endogenous merger process to examine the effects of trade liberalization on industry structure. Domestic and cross-border mergers and demergers are allowed for. When firms are myopic and the dominant firm has a sufficiently high pre-merger capital share in any one country, trade liberalization causes the industry to become significantly more concentrated. When firms are forward-looking, this anti-competitive effect of trade liberalization is mitigated. Tariff reduction from a prohibitive to a non-prohibitive level aligns merger patterns across countries and initiates merger (or demerger) waves simultaneously across countries, provided all firms are equally forward-looking. When the dominant firm is more forward-looking than the fringe, however, this result may be reversed. These results, thus, highlight the importance of taking into consideration existing industry structure and firms' discount rates whilst formulating competition policy in the face of trade liberalization.

Keywords: endogenous market structure, horizontal mergers, trade liberalization

JEL Classification: L41, F13

Suggested Citation

Ray Chaudhuri, Amrita, A Dynamic Model of Endogenous Mergers and Trade Liberalization (February 2008). CentER Discussion Paper No. 2008-22, TILEC Discussion Paper No. 2008-005, Available at SSRN: https://ssrn.com/abstract=1095682 or http://dx.doi.org/10.2139/ssrn.1095682

Amrita Ray Chaudhuri (Contact Author)

University of Winnipeg - Department of Economics ( email )

Winnipeg, Manitoba R3B 2E9
Canada

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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