Strategic managerial delegation and cross-border mergers

Abstract

The purpose of this paper is to clarify the relationship between the market structure in equilibrium and the most preferred structure with respect to each country’s social welfare and/or total social welfare, when all existing firms can freely merge with each other in an international oligopoly under the segmented market assumption in three cases: the case wherein all the firms are entrepreneurial and the cases wherein they use two different types of managerial delegation contracts. We focus our attention on the coincidence/non-coincidence between the equilibrium market structure (EMS) and the most socially preferred structure with respect to each country’s social welfare and/or total social welfare, as each firm’s production efficiency varies. When each firm’s production efficiency is relatively low, in all the three cases, the EMS coincides with the most socially preferred structure with respect to each country’s social welfare and total social welfare in a large area of the physical trade cost. On the other hand, when each firm’s production efficiency is relatively high, in the cases wherein they use the two different types of managerial delegation contracts, there exists an area of each firm’s production efficiency such that the EMS does not coincide with the most socially preferred structure with respect to each country’s social welfare and total social welfare. Therefore, as each firm’s organizational structure proceeds from entrepreneurial to managerial delegation, a more active merger policy is needed with respect to each country’s social welfare and total social welfare.