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Trade Theory, Analytical Models and Development

Essays in Honour of Peter Lloyd, Volume I

Edited by Sisira Jayasuriya

Trade Theory, Analytical Models and Development, comprises 11 essays offering new contributions on the following topics: trade and wages; factor endowments, factor mobility and political economy of trade; optimality of tariffs; measurement of welfare; customs union theory; endogenous mergers and tariffs; intra-industry trade; state trading enterprises and trade liberalisation; general equilibrium effects of e-Commerce, and trade; economic growth with production and consumption externalities; and environmental pollution and resource degradation.
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Chapter 6: Endogenous mergers and tariffs in an integrated market

Rod Falvey


6. Endogenous mergers and tariffs in an integrated market* Rod Falvey 1. INTRODUCTION The objective of this chapter is to explore the effects of tariffs on the profitability and global welfare consequences of mergers in open economies. The general reduction in trade barriers in the last few decades has brought the international aspects of domestic competition policies into greater prominence, and there now exists a significant literature dealing with mergers between firms located in different political jurisdictions.1 Two questions have been of particular interest. First, what type of merger activity, if any, has been encouraged by this general process of trade liberalization? Answering this question involves assessing the effects of trade policy on the profitability of mergers to their potential participants. But given that mergers are regulated in most states, a second element must also be considered. Are competition authorities likely to view mergers more or less favourably in a more open economy? Answering this question involves consideration of the effects of trade policy on the welfare costs and benefits of mergers. The success of international agreements constraining the ability of governments to use trade policies because of their undesirable beggar-thyneighbour consequences has raised concern that some governments may be tempted to substitute other policies, competition policy in particular, with similar outcomes (Lloyd and Sampson, 1995). Should trade agreements be complemented by agreements on, or ‘harmonization’ of, competition policies, and what form should such agreements take (Lloyd, 1998)? This concern prompted...

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