cross-border mergers and branding strategies of the multinational firms
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Cross-Border Mergers and Branding Strategies of the Multinational Firms. Toshihiro Ichida Waseda University MWIEG 2009 Penn State. Motivation. More than two-thirds of MNE's FDI flow is accounted for by the Cross-Border M&A. - PowerPoint PPT PresentationTRANSCRIPT
Cross-Border Mergers and Branding Strategies of the Multinational Firms
Toshihiro IchidaWaseda University
MWIEG 2009 Penn State
Motivation
• More than two-thirds of MNE's FDI flow is accounted for by the Cross-Border M&A.
• In buying the local firm, MNE faces choices in its branding strategy: to keep both brands or to integrate brand names into one
• Examples: Air France & KLM Royal Dutch Airlines, IHG (InterContinental Hotel Group) & ANA Hotels in Japan, and Nordea (European Bank)
Related Literature
• Long and Vousden (1995 RIE)• Horn and Persson (2001 JIE)• Qiu and Zhou (2006 JIE)• Neary (2007 RES)• Lommerud, Straume, and Sorgard (2006 Rand)
Basic Model• 2 regions (N and S)• 3 firms (0 in N, 1 and 2 in S)• We consider the consumer market in S.• Assumption: entry is restricted because of
firm-specific ownership advantages by 0,1,2• N is advanced (cost advantage for firm 0)• Cross-Border Trade is costly (firm 0 needs to
pay t to ship to firms in S)• Differentiated-Product Cournot Competition
Initial SetupFirm 0
Firm 1 Firm 2
Region N
Region S
Consumers in Region S
MC = 0
MC = c MC = c
Trade Cost = t
Model
• Consumers in Region S: linear demand for each brand i given outputs of other brands
where b is an inverse measure of the degree of product differentiation.
jijiqbqapj jii and 2,1,0,
Merger Formation
1. No merger: M0 = {0,1,2}
2. One Cross-Border merger: MCB1 = {01,2}
3. One Cross-Border merger: MCB2 = {02,1}
4. One National merger: MN = {0,12}
• If N firm merges with a firm in S, then the merged firm can save on trade cost.
• If N firm merges with a firm in S, then the merged firm can reduce production cost.
No merger: M0 = {0,1,2}Firm 0
Firm 1 Firm 2
Region N
Region S
Consumers in Region S
MC = 0
MC = c MC = c
Trade Cost = t
jijiqbqapj jii and 2,1,0,
One Cross-Border merger: MCB1 = {01,2}
Firm 0
Firm 1Firm 2
Region N
Region S
Consumers in Region S
MC = 0
MC = cMC = c
Trade Cost = t
One Cross-Border merger: MCB1 = {01,2}
Firm 2
Region N
Region S
Consumers in Region S
MC = cL < cMC = c
jijiqbqapj jii and 2},01{,
Firm 01
One Cross-Border merger: MCB2 = {02,1}
Firm 1
Region N
Region S
Consumers in Region S
MC = c
jijiqbqapj jii and 1},02{,
Firm 02
Symmetric!
MC = cL < c
One National merger: MN = {0,12}
Firm 0
Firm 1 Firm 2
Region N
Region S
Consumers in Region S
MC = 0
MC = c MC = c
Trade Cost = t
One National merger: MN = {0,12}
Firm 0
Firm 1 Firm 2
Region N
Region S
Consumers in Region S
MC = 0
MC = c MC = c
Trade Cost = t
One National merger: MN = {0,12}
Firm 0 Region N
Region S
Consumers in Region S
MC = 0
MC = c
Trade Cost = t
jijiqbqapj jii and }12{,0,
Firm {12}
The sequence of moves: stage
1. The firm owner decides whether to merge, who to merge with, etc.
2. If there is a merged firm, it decides whether to keep 2 brand names or to integrate into one brand name.
3. The firms simultaneously and independently set quantities.
Brand Strategy of the Merged Firm
• In the homogeneous product oligopoly model, the horizontal merger gives the merged firm a scale merit. (and there is no choice of brand)
• In the differentiated product oligopoly model, the merged firm faces a following choice in its branding strategy:
1.Brand Integration2.Brand Separation
Brand Strategy of the Merged Firm
1. Brand Integration• The merged firm will integrate (formerly
separated) 2 brand names into one.2. Brand Separation• The merged firm decides to keep the original
2 brand names.• The merged firm will maximize joint profit
from the 2 brands.
One Cross-Border merger: MCB1 = {01,2}
Firm 0
Firm 1Firm 2
Region N
Region S
Consumers in Region S
MC = 0
MC = c MC = c
Trade Cost = t
Brand 2Brand 1
Brand 0
Firm 0 and Firm 1 will merge
One Cross-Border merger: MCB1 = {01,2} + Brand Integration
Firm 2
Region N
Region S
Consumers in Region S
MC = cL
MC = c
jijiqbqapj jii and 2},01{,
Firm {01}
Brand {01}Brand 2
One Cross-Border merger: MCB1 = {01,2} + Brand Separation
Firm 2
Region N
Region S
Consumers in Region S
MC = cL
MC = c
jijiqbqapj jii and 2,1,0,
Firm {01}
Brand 1 Brand 2Brand 0
Merged firm maintains 2 brand lines
Output coordination
One National merger: MN = {0,12}
Firm 0
Firm 1 Firm 2
Region N
Region S
Consumers in Region S
MC = 0
MC = c MC = c
Trade Cost = t
Brand 0 Brand 1 Brand 2
Firm 1 and Firm 2 will merge
One National merger: MN = {0,12} + Brand Integration
Firm 0 Region N
Region S
Consumers in Region S
MC = 0
MC = c
Trade Cost = t
jijiqbqapj jii and }12{,0,
Firm {12}
Brand {12}Brand 0
One National merger: MN = {0,12}
+ Brand Separation Firm 0 Region N
Region S
Consumers in Region S
MC = 0
MC = c
Trade Cost = t
jijiqbqapj jii and 2,1,0,
Firm {12}
Brand 2Brand 0 Brand 1
Output coordination
Merged firm maintains 2 brand lines: 1 & 2
Export or Not
• For M0 (No merger) case and MN (National merger) case, firm 0 (of region N) may or may not serve the consumer market in region S.
• Firm 0 must export its outputs by paying trade cost t. The govt. can control part of t.
• The government of region S may be able to foreclose its market from foreign firm 0 by setting the tariff level if it is beneficial.
No merger: M0 = {0,1,2}Firm 0
Firm 1 Firm 2
Region N
Region S
Consumers in Region S
MC = 0
MC = c MC = c
Trade Cost = t
jijiqbqapj jii and 2,1,0,
b
cabat
2
)(2Foreclosure condition
One National merger: MN = {0,12} + Brand Integration
Firm 0 Region N
Region S
Consumers in Region S
MC = 0
MC = c
Trade Cost = t
jijiqbqapj jii and }12{,0,
Firm {12}
Brand {12}Brand 0
2
)( cabat
Foreclosure condition
One National merger: MN = {0,12}
+ Brand Separation Firm 0 Region N
Region S
Consumers in Region S
MC = 0
MC = c
Trade Cost = t
jijiqbqapj jii and 2,1,0,
Firm {12}
Brand 2Brand 0 Brand 1
Output coordination
b
bcat
1
Foreclosure condition
Foreclosure or import from N
An inverse measure of the degree of product differentiation b0 1
a
More differentiated
Identical
Foreclosure or import from N
An inverse measure of the degree of product differentiation b0 1
a
No merger case
3
2ca
Foreclosure
Allow import by 0
Foreclosure or import from N
An inverse measure of the degree of product differentiation b0 1
a
3
2ca
Foreclosure
Allow import by 0
2
ca
One national merger with Brand Separation
Output coordination effect → higher priceswith the same number of brand lines
Foreclosure or import from N
An inverse measure of the degree of product differentiation b0 1
a
One national merger with Brand Integration
3
2ca
Foreclosure
Allow import by 0
2
ca
Reduction of brand lines
Cross-Border Merger case• Firm 0 of region N will merge with one of the
firms in region S (firm 1 or 2).• WLOG, we look at the case of MCB1 = {01,2}.
• The merged firm {01} will compete with firm 2 in the consumer market in region S.
• The merged firm {01} locates now in S, so it need not pay trade cost t anymore.
• The merged firm {01} has lower production cost cL < c.
Cross-Border Merger case
• The merged firm {01} will compete with firm 2 in the consumer market in region S.
• The branding strategy of the firm {01}:1.Brand Integration: brand {01} vs. brand 22.Brand Separation: brand 0 and 1 vs. brand 2
(where firm {01} will control output levels of two brand lines jointly.)
One Cross-Border merger: MCB1 = {01,2} + Brand Integration
Firm 2
Region N
Region S
Consumers in Region S
MC = cL
MC = c
jijiqbqapj jii and 2},01{,
Firm {01}
Brand {01}Brand 2
One Cross-Border merger: MCB1 = {01,2} + Brand Separation
Firm 2
Region N
Region S
Consumers in Region S
MC = cL
MC = c
jijiqbqapj jii and 2,1,0,
Firm {01}
Brand 1 Brand 2Brand 0
Merged firm maintains 2 brand lines
Output coordination
Optimal Brand Strategy in MCB1
Proposition 3 (after cross-border merger)There exist a threshold value b* which does not depend on the parameters of the model (such as a, c, & cL) such that
for b ≥ b* ↔ πBI{01} ≥ πBS
{01}.
and for b < b* ↔ πBI
{01} < πBS{01}. And
b* ≈ 0.72082.
Conclusion• The paper looked at merger incentives and
brand strategy after the merger.• The analysis is still preliminary. I did not
conduct global comparison of different merger types yet.
• Need to look at comparison of welfare (vary t)• Trade cost is composed of t = tU + τ where tU is
uncontrollable part of trade cost and τ is tariff level.