On Mergers and Agglomeration

We formulate a model of mergers and acquisitions assuming a monopolistic competitive industry that exhibits agglomeration economies. We provide the conditions for the existence of a non-trivial Nash equilibrium in the acquisition market at which the most productive firm acquires a range of less-productive firms. Most importantly, we show that domestic merger and acquisition activities are international trade promotionary. We also show that such types of mergers and acquisition will improve the competitive position of foreign firms leading to an increase in their market share. In addition, domestic mergers and acquisitions will increase the number of imported varieties.