In-Market vs. Cross-Border Merging: The Impact of Merger Policy

Abstract

In this paper, we study how merger policy affects the choice between domestic and cross-border merger. We build a model where a firm chooses between these two types of mergers. While a domestic merger will be refused if it is anticompetitive, a cross-border merger has an uncertain ex-post profitability. We first study this tradeoff in a scenario where, after a non-profitable cross-border merger, exiting the foreign market through another merger is not possible. In this case, a more lenient merger policy discourages cross-border mergers relative to domestic mergers. However, if it is possible to exit through a domestic merger, this tradeoff is altered, as a more lenient merger policy lowers barriers to exit, thereby increasing the profitability of a cross-border merger.JEL classification: L22, L40, D21, G34.