Title: International Trade, Upstream Market Power, and Endogenous Mode of Downstream Competition
Abstract:In a trade model with both horizontal and vertical product differentiation, we analyze the implications of upstream market power for the endogenous mode of downstream competition. We show that when hi...In a trade model with both horizontal and vertical product differentiation, we analyze the implications of upstream market power for the endogenous mode of downstream competition. We show that when high-quality exports are manufactured under large frictions due to upstream monopoly power, the exporter 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). We also show that the availability of FDI as an alternative to trade can make 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. Our results show that strategic asymmetry is welfare improving and has important implications for both trade and FDI policy.Read More
Publication Year: 2020
Publication Date: 2020-01-01
Language: en
Type: preprint
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