Merger policy in open economies

We extend Farrell and Shapiro's (1990) analysis of horizontal mergers to the case of an open economy. We show how the rules for approving a merger ought to be adapted to account for the fact that the regulator is only concerned with domestic welfare, that is, ignores the effect of the merger on foreign firms and consumers. We also explore the consequences of this externality in a model of a 'single market' which includes consumers and producers of different countries. In particular, we provide conditions under which a decentralized process of evaluating merger proposals à la Farrell-Shapiro can survive the externality mentioned above.