Procompetitive Market Access

The view that U.S. businesses are being unfairly hurt by barriers to access in foreign markets has raised demands for market access requirements (MARs) from within U.S. industry and government alike. We show that, contrary to the prevailing wisdom of the recent literature, MARs can be implemented in a procompetitive manner. The basic idea is that the requirement must be implemented in a way that provides the right incentives for increasing aggregate output or lowering prices. We provide two examples to illustrate this point. In the context of a Cournot duopoly, we show that an implementation scheme in which the U.S. firm receives a pre-announced subsidy if the market share target is met leads to increased aggregate output. In a second example, we show that a MAR on an imported intermediate input can lead not only to increased imports of the intermediate good, but also to increased output in the final good market using the input. The intuition is that increasing output of the final good helps to make the MAR less binding and this reduces the marginal cost of production in the final good market. Thus our results buttress the point made in Krishna, Roy and Thursby (1997) that the effects of MARs depend crucially on the details of their implementation.

Free Riding in Noncooperative Entry Deterrence with Differentiated Products

We examine free riding and underinvestment in noncooperative entry deterrence in the Gilbert and Vives (1986) model with differentiated products. Our analysis proves that for products that are differentiated enough, when both entry allowing and entry deterring equilibria coexist, the symmetric entry deterring equilibrium may Pareto dominate the entry equilibrium. Hence, coordination failure underinvestment in entry prevention can occur. However, as claimed, the overinvestment result of Gilbert and Vives remains robust to moderate amounts of product differentiation. We also show that coordination failure underinvestment arises in a wide variety of entry deterrence models and does not rely on assumptions regarding strategic substitutability or complementarity of precommitments

Can Subsidies for MARs be Procompetitive?

In contrast to recent literature, we show that market access requirements (MARs) can be implemented in a procompetitive manner even in the absence of threats in related markets. By focusing on subsidies that are paid only when the requirement is met, we show that a MAR can increase aggregate output relative to free trade provided that the right set of firms is targeted. In the context of a model with multiple Japanese and US firms, we show that a MAR on US imports is procompetitive as long as the US firms are the ones targeted to receive the subsidy.

Implementing Market Access

The outcome of trade policies to increase access for foreign firms to the home country's market is shown to be sensitive to the implementation procedure used. The importance of the timing of moves between government and firms is highlighted by focusing on taxes and subsidies to implement minimum market share requirements. Both taxes and subsidies chosen by the home government after firms have picked prices create powerful incentives for firms to raise prices - effects that are similar in nature to those found with quotas/VERs. We show that some degree of imprecision in implementing the target engenders less anticompetitive outcomes relative to perfect enforcement.

Essays in industrial organization

The first essay examines the phenomenon of free riding and underinvestment in noncooperative entry deterrence in the Gilbert and Vives (1986) model with differentiated products. Our analysis proves that when both entry allowing and entry deterring equilibria coexist, underinvestment can occur in that the symmetric entry deterring equilibrium may Pareto dominate the unique entry equilibrium. This contradicts Gilbert and Vives\u27 claim that the overinvestment result of their homogeneous product model generalizes to the symmetric product differentiation case. We identify a necessary condition for underinvestment, namely, an incumbent firm\u27s maximum profit from deterring entry must be increasing in the rival incumbent\u27s output at that rival output level at which the firm is indifferent between allowing entry and deterring entry. Our second essay examines the implications of replacing the Cournot market clearing assumption with Bertrand-Edgeworth behavior when production is time-consuming. The benchmark for the analysis is Saloner\u27s (1987) study which shows that when two firms simultaneously choose quantities in each of two production periods before the market clears, every point on the outer envelope of the Cournot reaction functions between the Stackelberg outcomes can be obtained in equilibrium. We demonstrate that this result is not robust to the introduction of Bertrand-Edgeworth competition. When the cost of capacity is small, the Bertrand-Edgeworth leader-follower points lie in the mixed strategy pricing range. Except for these leader-follower points, none of the points on the outer envelope of the capacity best responses which lie in the mixed strategy region can be sustained in a subgame perfect equilibrium

Can Subsidies for MARs be Procompetitive

We show that a market access requirement (MAR) can increase competition and reduces prices if a properly designed subsidy scheme is used to enforce the requirement. This is in contrast to most of the recent literature which has generally concluded that MARs are unambiguously anticompetitive. Our analysis underscores the importance of proper targeting and shows that it is sensitive to the composition of firms within an industry

Implementing Market Access

The outcome of trade policies to increase access for foreign firms to the home country\u27s market is shown to be sensitive to the implementation procedure used. The importance of the timing of moves between governement and firms is highlighted by focusing on taxes and subsidies to implement minimum market share requirements

Can subsidies for MARs be procompetitive?

In contrast to recent literature, we show that market access requirements (MARs) can be implemented in a procompetitive manner even in the absence of threats in related markets. By focusing on subsidies that are paid only when the requirement is met, we show that a MAR can increase aggregate output relative to free trade provided that the right set of firms is targeted. In the context of a model with multiple Japanese and U.S. firms, we show that a MAR on U.S. imports is procompetitive as long as the U.S. firms are the ones targeted to receive the subsidy.