Effect of mergers on firm profits with trade liberalization: the role of technology

Abstract

The objective of this study is to analyse the effects of trade liberalization on the firm-level profit-enhancing effects of mergers and its dependence on whether the technology is labour intensive or capital-intensive, under an oligopolistic competition framework. Mergers, as considered in this article, cause an increase in the firm-level profits. The extent to which they enhance the profits is inversely proportional to the number of firms in the country. With a freer trade, the profit effect of mergers depends on the extent to which the fall in profit due to fall in price outweighs the gain in profit due to increased output. A firm in the capital-intensive country can gain more from a merger than one in the labour-intensive country, if the aggregate output is at sufficiently large scale.