Merger Policy in a Quantitative Model of International Trade

Abstract

In a globalizing world, the decisions of national merger authorities impose externalities on foreign jurisdictions. In a two-country international trade model with oligopolistic competition, we study the potential conflicts between national merger authorities and provide conditions under which they arise. When deciding whether to block a proposed merger to prevent harm on domestic consumers, each authority faces a trade-off between the market power effect of the merger and its efficiency effect. Because of trade costs and asymmetries between countries, the same merger may be good for consumers in one country but bad for consumers in the other. Endogenizing the merger formation process and explicitly modeling the authorities' decisions, we calibrate the model to match industry-level data for 160 sectors in the U.S. and Canada. We find that mergers that are good for Canadian consumers tend to be beneficial for U.S. consumers as well, whereas the reverse does not hold. We also show that adopting a supra-national authority that blocks a merger if and only if it reduces aggregate consumer surplus in the two countries would lead to significant gains for U.S. consumers but hurt consumers in Canada.