Product differentiation, asymmetric information and international mergers

Information asymmetry creates value and incentives for firms from different countries to merge. To demonstrate this point, we develop a model of international trade under oligopolistic competition and asymmetric information, in which domestic firms are informed of the local market demands, but foreign firms are not. By emphasizing two features of a merger between a domestic firm and a foreign firm, we show that the two firms always want to share information, but output coordination is not always profitable, depending on the extent of product differentiation. We also examine how such a merger affects the non-merging firms' profits, consumer surplus, domestic welfare and global welfare. The results are crucially determined by the extent of product differentiation