cross-border mergers and branding strategies of the multinational firms toshihiro ichida waseda...

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


MC = 0

MC = c MC = c

Trade Cost = t


One Cross-Border merger: MCB1 = {01,2}

Firm 0

Firm 1Firm 2

Region N

Region S


MC = 0

MC = cMC = c

Trade Cost = t


Firm 2

Region N

Region S


MC = cL < cMC = c

jijiqbqapj jii and 2},01{,

Firm 01


Firm 1

Region N

Region S


MC = c


Firm 02

Symmetric!

MC = cL < c

One National merger: MN = {0,12}

Firm 0

Firm 1 Firm 2

Region N

Region S


MC = 0

MC = c MC = c

Trade Cost = t


Firm 0 Region N

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.


Firm 0

Firm 1Firm 2

Region N

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


MC = cL

MC = c


Firm {01}

Brand {01}Brand 2

One Cross-Border merger: MCB1 = {01,2} + Brand Separation

Firm 2

Region N

Region S


MC = cL

MC = c


Firm {01}

Brand 1 Brand 2Brand 0

Merged firm maintains 2 brand lines

Output coordination


Firm 0

Firm 1 Firm 2

Region N

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


MC = 0

MC = c

Trade Cost = t


Firm {12}

Brand {12}Brand 0


+ Brand Separation Firm 0 Region N

Region S


MC = 0

MC = c

Trade Cost = t


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


MC = 0

MC = c MC = c

Trade Cost = t


b

cabat

2

)(2Foreclosure condition

One National merger: MN = {0,12} + Brand Integration

Firm 0 Region N

Region S


MC = 0

MC = c

Trade Cost = t


Firm {12}

Brand {12}Brand 0

2

)( cabat

Foreclosure condition


+ Brand Separation Firm 0 Region N

Region S


MC = 0

MC = c

Trade Cost = t


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



a

No merger case

3

2ca

Foreclosure

Allow import by 0



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



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


MC = cL

MC = c


Firm {01}

Brand {01}Brand 2

One Cross-Border merger: MCB1 = {01,2} + Brand Separation

Firm 2

Region N

Region S


MC = cL

MC = c


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.

cross-border mergers and branding strategies of the multinational firms toshihiro ichida waseda...

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