A Dynamic Model of Endogenous Mergers and Trade Liberalization

A. Ray Chaudhuri

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages38
Volume2008-22
Publication statusPublished - 2008

Publication series

NameCentER Discussion Paper
Volume2008-22

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Keywords

  • endogenous market structure
  • horizontal mergers
  • trade liberalization

Cite this

Ray Chaudhuri, A. (2008). A Dynamic Model of Endogenous Mergers and Trade Liberalization. (CentER Discussion Paper; Vol. 2008-22). Tilburg: Microeconomics.