The thesis examines, theoretically and empirically, the argument that permissiveness toward domestic mergers will improve national welfare in an internationally competitive environment. The notion of oligopolistic international markets has influenced not only the perspective of U.S. trade policy but also that of domestic antitrust policy. Recently, many policymakers and economists have come to believe that the appropriate antitrust policy in an era of increased foreign competition may actually be to encourage rather than to prohibit domestic mergers.

I set up a theoretical model to investigate whether and when enhanced competitiveness arising from mergers can improve total U.S. welfare. I assume that oligopolists compete non-cooperatively (Cournot-Nash) to sell a homogenous product in a worldwide market with domestic firms at a cost disadvantage relative to foreign firms. The analysis derives relatively simple conditions for determining the extent of post-merger cost saving required to increase total domestic surplus. It is shown that, contrary to the thrust of recent administration's proposals, cost saving domestic mergers are more likely to improve national welfare in exporting industries than in industries suffering from import competition.

The theoretical model is calibrated to study the case for domestic mergers in the steel and aluminum industries.

I also discuss the issue of whether mergers actually enhance the competitiveness of domestic firms. Data on the performance of horizontally-merged U.S. companies from 1970 to 1979 are examined to see the empirical significance of cost-savings from horizontal mergers.