Post by Sapphire Capital on Jul 12, 2008 20:46:55 GMT 4
A Dynamic Model of Endogenous Mergers and Trade Liberalization
AMRITA RAY CHAUDHURI
Tilburg University - Center and Faculty of Economics and Business Administration; Tilburg Law and Economics Center (TILEC)
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February 2008
CentER Discussion Paper No. 2008-22
TILEC Discussion Paper No. 2008-005
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1095682_code629430.pdf?abstractid=1095682&mirid=3
AMRITA RAY CHAUDHURI
Tilburg University - Center and Faculty of Economics and Business Administration; Tilburg Law and Economics Center (TILEC)
--------------------------------------------------------------------------------
February 2008
CentER Discussion Paper No. 2008-22
TILEC Discussion Paper No. 2008-005
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1095682_code629430.pdf?abstractid=1095682&mirid=3