GEP 16/08: Merger Policy in a Quantitative Model of International Trade

Summary

The economic activity of many firms increasingly extends beyond national borders through exports, imports and the establishment of local affiliates. This implies that the effects of mergers on consumer and input prices can differ across jurisdictions and conflicts between national antitrust authorities may arise. For example, if two companies have substantial market shares in a smaller foreign market, their merger might have stronger anticompetitive effects there than in their more competitive home market. The past two decades have indeed seen a number of high-profile competition cases which illustrate this potential for conflict, including the proposed merger of the South African platinum interests of Gencor and Lonrho in 1996 (approved in South Africa but blocked by the EU Commission), or the planned acquisition of the Italian company Metlac by the Dutch company Akzo Nobel, which was cleared by several European antitrust authorities but blocked by the UK Competition Commission in 2012.

In this Nottingham School of Economics working paper GEP internal fellow Holger Breinlich and colleagues from the University of Mannheim propose a quantitative framework which can be used to understand the determinants of conflict between merger authorities, to analyse which types of conflicts are likely to arise in practice, and to provide a sense of the economic importance of these conflicts. The paper develops a two-country model of international trade, where in each country heterogeneous firms compete in an oligopolistic fashion. Conditions on market structure and trade costs are studied under which a merger policy designed to benefit domestic consumers is too tough or too lenient from the viewpoint of the foreign country. Calibrating the model to match industry-level data in the U.S. and Canada, the authors show that at present levels of trade costs merger policy is too tough in the vast majority of sectors. They also quantify the resulting externalities and study the impact of different regimes of coordinating merger policies at varying levels of trade costs.

GEP 16/08, Merger Policy in a Quantitative Model of International Trade by Holger Breinlich, Volker Nocke and Nicolas Schutz

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Authors

Holger Breinlich, Volker Nocke and Nicolas Schutz

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