Mergers in open economies

Can undesirable (from a global perspective) outcomes be prevented by an international agreement establishing common rules for merger approval? Or must a global merger authority be established, and if so by what rules should it operate? Here we investigate the economic issues involved in answering these questions and illustrate them through a simple model intended to highlight the international links involved. Section 2 begins by considering the circumstances under which a merger will raise both the joint profits of the participating firms and global welfare. These conditions are first investigated in the context of a closed economy. Section 3 then looks at the implications of trade liberalisation on the profitability of mergers, finding that liberalisation is likely to generate merger activity involving firms in the previously protected market. Complete liberalisation achieves an integrated world market, where the conditions for profitable and welfare improving mergers are as in the closed market. But whether mergers that meet both these conditions will be permitted to proceed depends on how the costs and benefits from the merger are distributed internationally. Section 4 therefore considers the welfare implications of mergers between firms in the same country (national mergers) and in different countries (international mergers). Potential conflicts between national welfare and world welfare as criteria for merger approval become apparent, and the considerable difficulties involved in avoiding such conflicts are highlighted. The final section presents a summary and conclusions.