We analyze the effects of bilateral tariff reductions on the profitability of cost-reducing horizontal mergers. Given Cournot competition in a two-country world, for any positive tariff below a certain threshold, marginal trade liberalization is shown to encourage only those domestic mergers...

The paper models international rivalry between a domestic firm that is going through a learning-by-doing phase, and a mature foreign rival. It is shown that the optimal production subsidy for the domestic firm depends on the degree of strategic sophistication of the foreign firm. Optimal...