G. Badri Narayanan
The objective of this study is to analyse the effects of trade liberalisation on profits of a capital-intensive exporting country and a labour-intensive one with different cost functions and the welfare of the importing country, as well as the effects of trade liberalisation on the firm-level profit-enhancing effects of mergers, under an oligopolistic competition framework.
The results show that output is increasing in the degree of trade liberalisation and price falls with it. However, the effects of freer trade on profits of the exporting countries are ambiguous and depend on the net gains in profit from free trade. Given the same level of output for both countries, a sufficiently high output would bring more profits to the capital-intensive country than to the labour-intensive country.
Welfare of the importing country, at least within this framework, is increasing in the degree of trade liberalisation, provided that the initial level of restrictions in trade are not too high.
Mergers, as considered in this paper, cause an increase in the firm-level profits. The extent to which they enhance the profits is inversely proportional to the number of firms in the country. With a freer trade, the profit effect of mergers depends on the extent to which the fall in profit due to fall in price outweighs the gain in profit due to increased output. A firm in the capital-intensive country can gain more from a merger than one in the labour-intensive country if the aggregate output is at a sufficiently large scale.