A reappraisal of strategic trade policies with the endogenous mode of competition under vertical structures

This paper examines the endogenous choice of competition mode with strategic export policies in vertically related markets when each upstream firm located in each country determines the terms of the two-part tariff contract by maximizing generalized Nash bargaining. We show that (i) choosing Cournot (Bertrand) competition is the dominant strategy for both downstream firms when goods are substitutes (complements), which leads Pareto superior regardless of the nature of goods under the optimal trade policies; (ii) irrespective of rival’s competition mode, the optimal trade policy is an export subsidy under Cournot competition and an export tax under Bertrand competition; and (iii) trade liberalization may give rise to changes of competition mode and increase of social welfare.     

Robust rules for industrial policy open economies

The theory of strategic trade policy yields ambiguous recommendations for assistance to exporting firms in oligopolistic industries. However, some writers have suggested that investment subsidies are a more robust recommendation than export subsidies. We show that, although ambiguous in principle, the case for investment subsidies is reasonably robust in practice. Except when functional forms exhibit arbitrary nonlinearities, it holds under both Cournot and Bertrand competition, with either costreducing or market-expanding investment, and with or without spillovers. Only if firms have strong asymmetries in their investment behaviour and engage in Bertrand competition is an investment tax clearly justified.     

Strategic trade policy with endogenous choice of quality and asymmetric costs

This paper examines strategic trade and joint welfare maximizing incentives towards investment in the quality of exports by an LDC and a developed country. Firms first compete in qualities and then export to an imperfectly competitive, third country market. Under Bertrand competition, unilateral policy involves an investment subsidy by the low-quality LDC and an investment tax by the developed country, whereas jointly optimal policy calls for the reverse so as to reduce price competition by increasing product differentiation. Under Cournot competition, unilateral policy is also reversed from the Bertrand outcome, but jointly optimal policy involves a tax in both countries.     

UNIONIZATION AND STRATEGIC TRADE POLICY

This article examines the effect of unionization on welfare and trade policy using a model of duopolists competing in a third market. The traditional result that the presence of a union necessitates a stronger strategic trade policy to reach the optimal level of welfare hinges on the mode of competition. With Bertrand duopolists, a union can be welfare-improving; it can also lead to a weaker trade policy, or even reverse the direction of the optimal policy. Our results highlight the importance for trade policy of understanding the nature of firm behavior and the institutional features of the labor market.     

Verbraucherpolitik als gewerkschaftliche Aufgabe

Trade unions and consumer policy. In the first part of his essay, the author discusses the position of the DGB (Deutscher Gewerkschaftsbund), the largest and most important of the West German trade unions, in the field of consumer policy. Consumer policy has been part of the statute of the DGB since 1971. Trade unions in West Germany regard themselves as consumer organisations because their members are consumers as well as employees, and consumer policy is understood to be part of the general economic policy of the unions. In 1975, the congress of the DGB accepted a programme of consumer policy. The programme demands that consumers rank equal with producers in the market. This goal should be reached by price competition (as a dominant factor of competition), by transparency (Markttransparenz) of prices and quality, and by the appointment of an ombudsman as a legal caretaker of consumer interests. The DGB rejects new consumer organisations, because in its view the trade unions constitute a well organised consumer institution. There is some cooperation, however, with the Arbeitsgemeinschaft der Verbraucher, the chief German organisation for consumer affairs. The author disagrees with legal writers who deny trade unions a right of claim against unfair competition and against unfair standard contract clauses, according to para. 13 of the German Unfair Competition Act. In the second part of his essay, the author analyses the legitimation of trade union consumer policy. The discussion concerns the question of whether or not employees are the only consumers who are in need of protection, and if there is a conflict between their interests as employees and as consumers. The author suggests that legal consumer protection should shield only individual persons as buyers (not small firms, for example). Furthermore, consumer interests should be defined from the perspective of the consumer who is anemployee. A consumer who is at the same time an employer, does not need protection because he can compensate for the disadvantages sustained in his consumer role by exploiting his position as an employer. Conversely, the employee-consumer has the weaker position in both of his roles. Another important question is whether or not there is a conflict between a high standard of consumer protection and a high level of wages. The author cites some economists who suggest that this conflict may be resolved, and that the real conflict is not between consumers and employees, but between those two on the one side and business on the other. The author draws the conclusion that there exists a theoretical legitimation for trade unions to represent the consumer interest. There is a wide gap, however, between the programmes of the trade unions and their policy as evidenced by their everyday activities. The hope is expressed that this gap will become narrower.     

Profit reducing international outsourcing

Recent empirical evidence shows a negative relationship between international outsourcing and profitability. This paper provides a theoretical explanation for this phenomenon. We show that, in an oligopolistic market, firms earn lower profits in the outsourcing equilibrium compared to the situation where neither firm does outsourcing, and this holds irrespective of the intensity of competition. We show that whether international outsourcing is likely to reduce profit under more intense competition (measured by the degree of product differentiation, number of firms and the type of product market competition, namely, Cournot and Bertrand competition) is ambiguous. We further show that international outsourcing may be socially ‘excessive’ for the sourced country and for the world.     

The influence of demand factors on dynamic competitive pricing strategy: An empirical study

This empirical paper investigates the relationship between the dynamic strategic interactions among competitors in a component market and demand factors in the market for the end product. The structure of competition in the US microprocessor (MPU) industry is analyzed using data on prices and sales in both the MPU market as well as the market for personal computers. The pattern of dynamic strategic interaction between competing firms in this market on a key decision variable, price is studied. Non-nested model comparison tests based on equilibrium solutions derived for specific differential games are applied to identify the mode of competitive strategy between pairs of competing brands. The empirical fit to the longitudinal and cross-sectional data, of alternative models of competition, independent (Bertrand?CNash), Stackelberg leader?Cfollower, and Collusion, is used to determine which dynamic model best describes actual competitive behavior over the life of each MPU. Demand for the product market which is downstream from microprocessors, that for personal computers, is estimated using a generalized diffusion model with price effects. Data from the markets for desktop and laptop computers are analyzed at the level of computer vendor and internal microprocessor. Patterns are uncovered, linking downstream demand parameters with upstream competitive strategy. There is evidence to suggest that when there are strong diffusion effects driving sales of both the competing computer brands, there is a higher likelihood of Bertrand?CNash competition among MPU firms. However, when there are higher cross-price effects (substitutability) among personal computer brands there is a greater chance of Stackelberg leader?Cfollower price competition. When self-price effects are relatively high, the likelihood of Bertrand?CNash competition among MPU firms increases. Furthermore, when the potential demand for the computer product category is high, there is a higher likelihood of Bertrand?CNash pricing in the MPU market.     

Cross-Border Mergers & Acquisitions Policy in Service Markets

We provide facts showing that in service markets: (i) restrictions on foreign direct investment (FDI) are under reform, (ii) cross-border Mergers & Acquisitions dominate as the entry mode of FDI, and (iii) there is often a high market concentration. Based on these facts, we present a model for analyzing cross-border merger and acquisition policy in liberalized service markets taking into account efficiency and market power effects. Our findings suggest that a merger policy, but not a discriminatory policy towards foreigners, seems warranted. Moreover, policies ensuring competition for domestic target firms seem warranted. In this vein, harmonization of the EU takeover regulations may particularly benefit assets owners in countries with many target firms.     

The internationalization of competition policy: implications for international business

In the post–Uruguay Round World Trading System and with the creation of the World Trade Organization (WTO), a new set of agendas on the governance of the world economy has emerged. Among them are the relationship between trade and social policy, trade and the environment, and trade and competition policy. These issues are new in the sense that policymakers have, until now, avoided drawing direct‐policy linkages between them. The main reason for this is that traditionally social and competition policies have been domestic policy domains that international policymakers were prevented from influencing. While environmental policy has been subject to several international negotiations, the link between trade and the environment has been relatively under‐discussed in the GATT. Moreover, there have been few international agreements that have drawn a direct link between trade and the environment.¹ The focus of this paper is the relationship between trade and competition policy. In particular, this paper seeks to address the issues related to international competition policy and the concerns and problems faced by international business in this context. ¹ An exception being the agreement on trade in endangered species (CITES). © 2000 John Wiley & Sons, Inc.     

Inflation targeting rules and welfare in an asymmetric currency area

This paper studies the effect on monetary policy of differing degrees of competition and differing degrees of nominal rigidity between the members of a monetary union. In particular, we assess the welfare loss brought about by the use of a simple interest rate rule that does not take into account such structural differences. Our results show that, ceteris paribus, to maximize welfare the central bank should react more strongly to inflation pressure generated by the more competitive economies. Our work extends the results of Benigno [Benigno, P., 2004. Optimal monetary policy in a currency area. Journal of International Economics 63, 293-320] by showing that, if the degree of competition differs between countries, the optimal rule could involve placing a greater weight on the more “flexible” countries. Our study suggests that the size of the welfare losses generated by failure to take account of these asymmetries depends crucially on the actual combination of the various asymmetries. As a consequence, we show that, if the optimal weights are chosen under incomplete information regarding the extent and type of asymmetries, the resulting level of welfare could be lower than that produced by the symmetric rule.     

过度竞争、进入壁垒与流通组织优化

过度竞争是流通产业健康运行的重要障碍。文章从产品同质性和产品差异化两个角度,运用扩展的伯川德模型和萨洛普模型,分析了过度竞争在流通产业中出现的必然性,即流通产业自由进入的特点决定了过度竞争的存在。然后运用斯塔尔博格模型,采用跨期分析,指出了流通企业选择合适的投资水平可以阻止潜在进入者,避免过度竞争的发生。最后,提出了优化流通组织的建议。     

我国企业价格合谋的博弈论分析

随着市场竞争日益加剧,我国企业应从价格合谋的现象出发,运用库诺特——纳什均衡及伯川德——纳什均衡模型分析我国的企业合谋行为,指出企业合谋行为失败的原因在于企业技术创新能力不足和企业价格竞争行为的非理性。     

R&D policies, trade and process innovation

We set up a simple trade model with two countries hosting one firm each. The firms invest in cost-reducing R&D, and each government may grant R&D subsidies to the domestic firm. We show that it is optimal for a government to provide higher R&D subsidies the lower the level of trade costs, even if the firms are independent monopolies. If firms produce imperfect substitutes, policy competition may become so fierce that only one of the firms survives. International policy harmonization eliminates policy competition and ensures a symmetric outcome. However, it is shown that harmonization is not necessarily welfare maximizing. The optimal coordinated policies may imply an asymmetric outcome with R&D subsidies to only one of the firms.     

The Impact of the Recession on Competition Policy: Amending the Economic Constitution?

The strengths of the European competition regime are outlined before identifying challenges presented by the financial crisis. The argument moves from enforcement to systemic threats to the credibility of the economic models on which modern competition policy is based. It then turns from banking failures to the crisis in the European motor industry. It suggests that competition policy comprises an ‘economic constitution’ for the EU which is under threat, but registers the relative complacency of the competition agencies, and argues for a redefinition of policy. The conclusion suggests that the regulatory relationship between the state and the private sector will reflect scepticism about the market and that political changes in the UK and Europe offer radical choices between a reinforced or a marginalised competition policy which the competition policy ‘community’ needs to confront.     

Competition Policy for High Technology Industries

I present a model of optimal product-market competition policy when industries differ in the potential for quality-improving technological advance. In a two-period, model, a competition authority with limited resources administers a deterrence-based competition policy toward two industries. In one of the industries, an incumbent firm chooses the level of resources to invest in a quality-improving R&D project. In the other industry, product quality is constant. Optimal policy requires the competition authority to administer a tougher competition policy before innovation, all else equal, the greater the potential quality improvement. I derive basic results for the case of one-time innovation, and extend them to the cases of sequential innovation and patent protection that confers limited antitrust immunity.     

EU's competition policy and the GE‐Honeywell merger fiasco: Transatlantic divergence and consumer and regulatory issues

This article discusses and analyzes the European Union's (EU's) competition policy and the 2001 General Electric‐Honeywell merger fiasco within the areas of global business and transatlantic issues. Based on a brief literature review of marketing, competition policy/antitrust law, vertical/horizontal integration, and global business, the article tries to explain those conditions that led to this failed merger. It is expected that in the coming years, the EU's competition policy and the United States' antitrust law will continue to differ and may create problems for those multinationals seeking large‐scale mergers and acquisitions in North America and Europe. © 2005 Wiley Periodicals, Inc.     

International trade with endogenous mode of competition in general equilibrium

This paper endogenizes the extent of intra-sectoral competition in a multi-sectoral general-equilibrium model of oligopoly and trade. Firms choose capacity followed by prices. If the benefits of capacity investment in a given sector are below a threshold level, the sector exhibits Bertrand behavior, otherwise it exhibits Cournot behavior. By endogenizing the threshold parameter in general equilibrium, we show how exogenous shocks such as globalization and technological change alter the mix of sectors between “more” and “less” competitive, or Bertrand and Cournot, and affect the relative wages of skilled and unskilled workers, even in a “North–North” model with identical countries.     

全球贸易竞争对美国反垄断政策的影响

反垄断政策是美国政府最重要的经济政策之一。在贸易全球化时代,有观点认为,反垄断政策不利于美国企业在国际市场上的竞争,甚至认为应当将反垄断政策置于贸易政策之下。但美国政府接受了经济学家迈克尔·波特的理论,坚持激烈的国内市场竞争有助于美国企业国际竞争力形成的观点,反对将反垄断政策作为贸易政策的工具,并在政策取向上一方面对反垄断政策进行调整,使反垄断政策有助于推动企业创新;另一方面积极推动反垄断领域中的国际合作,为美国企业创造更加平等的竞争环境。     

Duopolistic Price Competition with Captives

We extend the Bertrand duopolistic competition to include captives. These are consumers that have no choice between the suppliers. Usual population of shoppers are modeled performing a sequential search in order to decide where to buy a homogenous good. These two simple departures from the original setup have sharp consequences. First, we find that duopolistic price competition is not robust to inclusion of captives. The equilibrium results starkly differ and the only possible equilibrium now includes duopolists charging monopolistic prices. Second, addition of sequential search introduces multiplicity of pure strategy Nash equilibria. In this setup, we observe perverse optimal response to competitor's price changes. Notably, we find that the firm might want to reduce the price in response to the competitor's price increase, which is at odds with the usual undercutting principle. Third, we investigate the behavior of equilibrium prices depending on the heterogeneity in consumer risk attitudes. We find that the higher consumer heterogeneity with respect to acceptance of risky gambles leads to higher prices in equilibrium.     

The Property Rights Theory of the Firm and Mixed Competition: A Counter-Example in the US Health Care Industry

We present a counter-example to the conventional property rights theory of the firm, which indicates that not-for-profit firms are incapable of directly competing against strictly profit-maximizing firms without the presence of barriers to entry, outside assistance, changing profit status or economies of scale and scope. We employ a modified Bertrand duopoly model of mixed competition in the health care industry to show that, even when these four conditions do not hold, not-for-profit firms may still be able to compete and possibly dominate the market. Consequently, market fundamentals, rather than market intervention, regulation or uncertainty, determine a not-for-profit provider's success or failure in the market. A necessary requirement is that the not-for-profit manager must care about non-pecuniary benefits but be willing to accept lower than normal returns. Moreover, under specific cost and demand conditions, a not-for-profit's ability to compete may actually be enhanced by increasing its production of non-pecuniary benefits.