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Trade Liberalization and the Profitability of Mergers: a Global Analysis

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  • Hassan Benchekroun
  • Amrita Ray Chaudhuri

Abstract

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 with sufficiently large cost‐savings and to discourage the rest. For tariffs close to, but smaller than, the prohibitive tariff, however, marginal trade liberalization necessarily encourages all domestic mergers. Moreover, we show that for a given level of cost‐savings, the impact of marginal trade liberalization may not reliably predict that of nonmarginal liberalization. Although at high tariffs, domestic mergers are shown to be unambiguously more profitable than cross‐border mergers, near free trade, mergers which yield the most cost‐savings become the most profitable. Thus, when comparing domestic and cross‐border mergers, trade liberalization encourages the type which yields the most cost‐savings.

Suggested Citation

  • Hassan Benchekroun & Amrita Ray Chaudhuri, 2006. "Trade Liberalization and the Profitability of Mergers: a Global Analysis," Review of International Economics, Wiley Blackwell, vol. 14(5), pages 941-957, November.
    • Handle: RePEc:bla:reviec:v:14:y:2006:i:5:p:941-957
    DOI: 10.1111/j.1467-9396.2006.00598.x
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    References listed on IDEAS

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    1. Halis Murat Yildiz, 2003. "National Versus International Mergers and Trade Liberalization," Working Papers 2003.56, Fondazione Eni Enrico Mattei.
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    Cited by:

    1. Ray Chaudhuri, A., 2014. "Acquisitions by Multinationals and Trade Liberalization," Other publications TiSEM 9dbb83b3-8647-4b5f-952b-3, Tilburg University, School of Economics and Management.
    2. Ray Chaudhuri, A., 2008. "A Dynamic Model of Endogenous Mergers and Trade Liberalization," Other publications TiSEM 8b3bda8c-ac25-4522-8090-c, Tilburg University, School of Economics and Management.
    3. Ray Chaudhuri, A. & Benchekroun, H., 2008. "Welfare Effect of Mergers and Trade Liberalization," Discussion Paper 2008-009, Tilburg University, Tilburg Law and Economic Center.
    4. Ulus Aysegul & Yildiz Halis M., 2012. "On the Relationship between Tariff Levels and the Nature of Mergers," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-40, December.
    5. Kayalica, Ozgur M. & Espinosa-Ramirez, Rafael S., 2009. "Brotherhood of competition: Foreign Direct Investment and domestic mergers," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 63-69, January.
    6. Srinivasan, Shweta, 2020. "Foreign competition and acquisitions," Journal of Corporate Finance, Elsevier, vol. 60(C).
    7. Fu, Qiuyao & Zhang, Teng & Li, Yunong, 2021. "Trade liberalization induced profitability enhancement? The impact of intermediate input imports on firm profitability," Journal of Asian Economics, Elsevier, vol. 75(C).
    8. Amrita Ray Chaudhuri, 2014. "Cross-Border Mergers and Market Segmentation," Journal of Industrial Economics, Wiley Blackwell, vol. 62(2), pages 229-257, June.
    9. Kenji Fujiwara & Ngo Van Long, 2012. "Welfare Effects of Reducing Home Bias in Government Procurements: A Dynamic Contest Model," Review of Development Economics, Wiley Blackwell, vol. 16(1), pages 137-147, February.
    10. BOCCARD, Nicolas, 2009. "On efficiency, concentration and welfare," LIDAM Discussion Papers CORE 2009040, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. Serena Fatica, 2010. "Investment Liberalization and Cross‐Border Acquisitions: The Effect of Partial Foreign Ownership," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 320-333, May.
    12. M. Ozgur Kayalica & Rafael Salvador Espinosa Ramirez, 2012. "Political contributions, subsidy and mergers," EconoQuantum, Revista de Economia y Finanzas, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 9(2), pages 61-80, Julio-Dic.
    13. Fikru, Mahelet G. & Lahiri, Sajal, 2014. "Cross-border mergers with flexible policy regime: The role of efficiency and market size," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 58-70.

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