On Mergers and Agglomeration

• Published date: 01 February 2016
• Author: Hamid Beladi,Reza Oladi
• DOI: http://doi.org/10.1111/rode.12223
• Date: 01 February 2016

On Mergers and Agglomeration

Hamid Beladi and Reza Oladi*

Abstract

We formulate a model of mergers and acquisitions assuming a monopolistic competitive industry that

exhibits agglomeration economies. We provide the conditions for the existence of a non-trivial Nash

equilibrium in the acquisition market at which the most productive firm acquires a range of less-

productive firms. Most importantly, we show that domestic merger and acquisition activities are

international trade promotionary. We also show that such types of mergers and acquisition will improve

the competitive position of foreign firms leading to an increase in their market share. In addition,

domestic mergers and acquisitions will increase the number of imported varieties.

1. Introduction

Merger and acquisition activities have been a hallmark of developed economies.

While theoretical as well as empirical literature is relatively rich and intensive, it is

heavily focused on merger profitability. This well-worked branch of literature was

instigated by a celebrated paper by Salant et al. (1983), where it argued that a

merger in an oligopolistic industry is not profitable unless more than 80% of firms

merge, the so-called “merger paradox.”

1

Despite a heavy volume of research on the

causes of profitable mergers, the literature on the issue of mergers in open

economies—and as it relates to international trade—is relatively thin. In particular,

one seemingly unrelated causal link between domestic merger and foreign firm

competitiveness (i.e. protectionary or trade promotionary aspects of mergers) is

overlooked. In this study we show that merger and acquisition activities are in

essence trade promotionary. Hence, the main contribution of our paper is to this

branch of literature.

The main theme of the growing literature on mergers in open economies is that

trade liberalization affects merger activities. Long and Vousden (1995) show how

trade liberalization encourages mergers in an oligopoly market. Another theme is

that trade liberalization through its pro-competitive effects reduces the need for

domestic competitive policies (e.g. see Dixit, 1984). In yet another body of

literature the effects of trade liberalization on cross-border mergers have been

studied (e.g. see Long and Vousden, 1995; Neary, 2007; Davidson and Mukherjee,

2007).

2

In this paper we consider the effects of merger on international trade in the

presence of agglomeration.

To study the effects of mergers and acquisitions on international trade we first

construct a model of a merger in the presence of agglomeration. Apart from the

fact that the main question we address in this paper looks at acquisitions and trade

from a different angle, incorporation of agglomeration in our model construction is

*Oladi: Department of Applied Economics, Utah State University, 4835 Old Main Hill, Logan, UT,

84322-3530, USA. Tel: +1-435-797-8196, Fax: +1-435-797-2701, E-mail: reza.oladi@usu.edu. Beladi:

Department of Economics, University of Texas at, San Antonio, One UTSA Circle, San Antonio, TX,

78249, USA. Reza Oladi is thankful for financial support from Utah Agricultural Experiment Station.

Review of Development Economics, 20(1), 345–358, 2016

DOI:10.1111/rode.12223

©2016 John Wiley & Sons Ltd