Working Paper: CEPR ID: DP4325
Authors: J. Peter Neary
Abstract: 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.
Keywords: comparative advantage; cross-border mergers; general oligopolistic equilibrium; market integration; merger waves
JEL Codes: F10; F12; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | cross-border merger waves (F55) |
| cross-border mergers (F23) | specialization according to comparative advantage (F12) |
| cross-border mergers (F23) | shifts in production and trade patterns (F16) |
| cross-border mergers (F23) | distribution of income shifts towards profits (D33) |
| distribution of income shifts towards profits (D33) | downward pressure on wages (F66) |
| downward pressure on wages (F66) | lower prices across sectors (P22) |
| trade liberalization (F13) | gains from trade (F11) |
| cross-border mergers and exports are complements (F23) | exporting sectors are sources of foreign direct investment (F23) |