Foreign market entry, upstream market power, and endogenous mode of downstream competition

Type of content
Journal Article
Thesis discipline
Degree name
Publisher
Wiley
Journal Title
Journal ISSN
Volume Title
Language
en
Date
2022
Authors
Gilbert J
Oladi R
Koska, Onur A.
Abstract

In a differentiated duopoly model of trade and FDI featuring both horizontal and ver tical product differentiation, we examine whether globalization and trade policy mea sures can generate welfare gains by leading firms to change their mode of competition. We show that when a high-quality foreign variety is manufactured under large frictions due to upstream monopoly power, a foreign firm can become a Bertrand competitor against a Cournot local rival in equilibrium, especially when the relative product quality of the foreign variety is sufficiently high and trade costs are sufficiently low (implying higher input price distortions due to double marginalization). Our results suggest that such strategic asymmetry is welfare improving and that the availability of FDI as an alternative to trade can make welfare-enhancing strategic asymmetry even more likely, especially when both input trade costs and fixed investment costs are sufficiently low and trade costs in final goods are sufficiently large.

Description
Citation
Gilbert J, Koska OA, Oladi R Foreign market entry, upstream market power, and endogenous mode of downstream competition. Review of International Economics.
Keywords
International trade, upstream market power, vertical product differentiation, horizontal product differentiation, Cournot-Bertrand-Nash equilibrium
Ngā upoko tukutuku/Māori subject headings
ANZSRC fields of research
1401 Economic Theory
1402 Applied Economics
Fields of Research::38 - Economics::3801 - Applied economics::380110 - International economics
Fields of Research::38 - Economics
Rights
All rights reserved unless otherwise stated