National versus international mergers and trade liberalization

This paper uses an endogenous merger formation approach in a concentrated international oligopoly to examine the effects of trade liberalization on the nature of merger incentives (national vs. international). The effects of unilateral trade liberalization on a country's industry structure are found to be depending on the other country's trade policy regime. If the other country practices free trade, unilateral liberalization by a country yields international mergers whereas if it practices a restrictive trade policy, national mergers arise. As trade gets bilaterally liberalized, the resulting equilibrium market structure is the one with international mergers. These results fit well with the fact that global trade liberalization has been accompanied by an increase in international merger activity. Among equilibrium market structures, international ones are found to be preferable from a welfare point of view. As a result, social and private incentives become aligned together as trade gets liberalized.