The Application Of Hotelling Model In Cross-border Mergers

Based on spatial extending Hotelling model, the consequences of cross-bordermergers are studied by the assumption of two asymmetrically sized countries,quadratic transportation costs and two firms located at the two countries of theHotelling line. The size of country, asymmetrical cost margin, product quality andgovernment subsidies which affect spatial repositioning of plant triggered bycross-border mergers and the form of trade and welfare effects of participatingcountries are key factors in our paper. Although reduction of transportation cost bypost-merger repositioning of the company raises welfare, monopoly decreasesconsumer surplus that cause welfare losses. The results show that, mergers improveglobal welfare and profit levels, but reduce the global consumer surplus. To theextent, Size of the country, cost margin, product quality and government subsidiesaffect the form of participating countries’ trade. Furthermore, the analysis providesnovel insights into the trade pattern effects of a merger. One important result in thisrespect is that relevant parameters can reverse the direction of (net) trade flowbetween two countries.