DP4325 Cross-Border Mergers as Instruments of Comparative Advantage

Author(s): J Peter Neary
Publication Date: March 2004
Keyword(s): comparative advantage, cross-border mergers, GOLE (General Oligopolistic Equilibrium), market integration, merger waves
JEL(s): F10, F12, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4325

A two-country model of oligopoly in general equilibrium is used to show how changes in market structure accompany the process of trade and capital market liberalisation. The model predicts that bilateral mergers in which low-cost firms buy out higher-cost foreign rivals are profitable under Cournot competition. With symmetric countries, welfare may rise or fall, though the distribution of income always shifts towards profits. The model implies that trade liberalisation can trigger international merger waves, in the process encouraging countries to specialise and trade more in accordance with comparative advantage.