STRATEGIC MANDATORY LABELING OF BIOTECHNOLOGY PRODUCTS IN THE ABSENCE OF QUALITY DIFFERENCE

This article examines the strategic use of mandatory labeling of biotechnology products, such as genetically modified food. A foreign dominant firm produces a biotechnology product and foreign competitive firms produce a conventional one. It is shown that if other trade measures such as tariffs are also available, the government of an importing country may impose mandatory labeling even in the case where there is no quality difference between biotechnology and conventional products. A combination of a discriminatory tariff on the biotechnology product and mandatory labeling shifts rents from the foreign dominant firm to the domestic economy.     

Welfare and quality improvement in an international market

This paper analyzes the optimal uniform and discriminatory quality requirements under Cournot competition when two firms produce high-quality and low-quality products, respectively, in an international market. The quality requirements in our paper are not set for the foreign firm but are set to regulate products of different qualities, since in the real world a domestic firm could be a high- or low-quality producer. We find that whether the government should raise the quality requirements depends on the type of competition in which firms engage and the adopted quality requirements. By and large, the government should always set quality requirements raising both firms’ quality directly or indirectly, regardless of the quality of the product of the domestic firm. However, if the domestic firm is a high-quality producer, the government should set a quality requirement that enables the domestic firm to monopolize the market when a discriminatory quality requirement is adopted, and should not set any quality requirement when a uniform quality requirement is adopted. Moreover, we show that the quality requirement can actually improve global welfare in most cases.     

Quality wars in the North

This paper investigates two stylised facts about quality wars between Northern firms and a Southern copycat firm in the North. First, due to low wage, a foreign or Southern copycat firm may enter the market of a developed economy inhabited by a high‐quality firm and a low‐quality domestic copycat. When the products of the high‐quality firm and the foreign copycat are vertically differentiated, the foreign copycat firm may choose an intermediate quality between the quality levels of domestic high‐ and low‐quality firms. In the second scenario where the products of the high‐quality firm and the foreign copycat are horizontally differentiated, the quality of the foreign copycat may surpass that of the domestic high‐quality firm. As the wage gap between the developed and developing countries widens, the foreign copycat is more likely to survive in the markets of developed economies.     

Inefficient but Robust Public Leadership

We investigate endogenous timing in a mixed duopoly in a differentiated product market. We find that private leadership is better than public leadership from a social welfare perspective if the private firm is domestic, regardless of the degree of product differentiation. Nevertheless, the public leadership equilibrium is risk-dominant, and it is thus robust if the degree of product differentiation is high. We also find that regardless of the degree of product differentiation, the public leadership equilibrium is risk-dominant if the private firm is foreign. These results may explain the recent revival of public financial institutions in Japan.     

Pareto-superior trade policy

Current literature shows the welfare superiority of ad valorem over specific tariffs or domestic governments facing foreign monopolists. This note establishes the stronger result that, for any given specific tariff imposed on a foreign monopoly, there exists an ad valorem tariff that Pareto dominates it - that produces larger profit for the foreign firm as well as larger tariff revenue and consumer surplus for the domestic economy. This Pareto ranking can be extended to the case of foreign Cournot oligopoly under certain market conditions.     

Quality disclosure in the presence of strategic consumers

Consider a market for short-life products, such as smartphones, where a firm and consumers have asymmetric quality information, the firm sells products in two periods, and consumers make purchase decisions strategically. We investigate when a firm should disclose quality and the interaction between consumers' strategic behavior and the firm's disclosure behavior. We obtain several findings. First, regardless of whether consumers have low or high patience, the firm should disclose quality information if product quality is high and conceal it if product quality is low. However, for products with moderate quality levels, the firm will disclose more quality information to consumers with relatively high or low patience levels than when consumer patience is moderate. Second, firms will disclose less information when consumers behave strategically than when they are myopic. Third, when concealing quality information is an equilibrium, product prices are affected only by disclosure costs and independent of true product quality. Finally, the firm can benefit from consumers' strategic behavior and a higher disclosure cost, but greater patience might be detrimental to consumer surplus and social welfare.     

Efficient bargaining,welfare and strategic export policy

We present an efficient bargaining model and analyse the welfare effects of unionization, where rival exporting governments employ strategic export policy. The domestic firm is unionized and conducts a Nash bargain with its union to determine wage and employment. The union may be wage oriented, wage neutral or employment oriented. The foreign firm is non-unionized. Stability of the reaction function equilibrium in policy space is sufficient for the following results: (i) domestic welfare increases with the degree of wage orientation; (ii) an increase in the union's bargaining power leads to higher (lower) domestic welfare if the union is wage (employment) oriented; (iii) if the domestic social marginal cost of labour is less than or equal to the foreign marginal cost, domestic market share is higher under wage orientation.     

Buy Local? Governmental Incentives to ‘Inform’ Consumers

This paper considers governmental incentives to provide information to local consumers about the relative merits of local versus foreign goods. We construct a model in which a local firm in a small, open economy competes in its domestic market with imports. Consumers are willing to pay an idiosyncratic premium for the local product, drawn from some support that the importing country government can affect through a costly information campaign. We examine incentives to undertake such a campaign in autarky and in the case of trade. We show, inter alia, that while a national welfare‐maximising government will always wish to shift this distribution upwards, it may not wish to reduce the variance of valuations, and that the optimal response of a foreign government will be to increase any support it offers to its exporters. Furthermore, falling world prices generally reduce the attractiveness of such a campaign both to a welfare‐maximising government and to one that cares only for domestic profits.     

Tariffs, quality reversals and exit in vertically differentiated industries

In a vertically differentiated industry a domestic and a foreign firm first choose the quality of their goods and then compete in quantities, or prices, in the home market. We investigate the cases in which a tariff is chosen before, or after, the firms’ quality decision. These cases are referred to as the ex-ante and the ex-post game, respectively. Optimal ex-post tariffs are positive and ensure that the domestic firm always produces the high quality good. The optimal ex-ante tariff is prohibitive and welfare under domestic monopoly is lower than under ex-post tariffs, unless firms compete in prices and the domestic firm is high quality.     

MARKET STRUCTURE,CAPITAL INFLOWS,AND HOME WELFARE

The welfare implications of foreign capital inflows in an economy with an imperfectly competitive product market and a capital-intensive import-competing sector are analyzed. If the market structure is exogenous with a fixed number of firms, then a capital inflow improves welfare of the host country. However, if the market structure is endogenous, then a capital inflow tends to be immiserizing because it increases entry and reduces per firm output, thus driving firms up their average cost schedule. In addition, the welfare implications of capital inflows in the presence of trade restrictions are also studied, generating some new insights.     

Parallel trade with an endogenous market structure

This paper sets up a two‐country model in which there is one domestic manufacturer authorising its product to a distributor in the foreign country. The distributor can sell the product not only to its own market (i.e., the foreign market) but also back to the domestic market. The latter is called parallel trade (PT). The paper investigates the effects of PT on the profits of the manufacturer and social welfare if the domestic market structure is endogenously determined. It is found that PT should be encouraged rather than banned as it increases not only the profits of the manufacturer but also the welfare of both the domestic and the foreign countries.     

Subcontracting bargaining power and the trade policy

In this paper, we consider that the split of surplus from a subcontracting deal depends on the relative bargaining powers of domestic and foreign firms. The finding shows that a domestic optimal export policy is a tax (subsidy) if the bargaining power of the domestic firm is sufficiently small (large). We also demonstrate that a domestic firm’s higher bargaining power increases (may decrease) domestic profit if the export policy is exogenous (endogenous). In the presence of an outsider option, the domestic optimal export policy will be threatened by the outsider option if the domestic firm’s bargaining power is sufficiently small, and thus a large bargaining power increases the optimal export tax. At the same time, the foreign firm may still subcontract to the domestic firm even if the domestic firm has a higher total marginal cost of the intermediate good than the outsider option.     

Domestic Regulation and International Trade

We consider the effects of a one-sided price regulation of one of two complementary inputs. The provider of the regulated input is a domestic firm, while the provider of the other input is a foreign firm. This describes the market structure for several digital information and communication services, where the regulated input is access while the non-regulated complementary input is content. We show that one-sided regulation may have negative welfare effects compared to a free market economy, unless the regulator has a first-mover advantage. In the latter case, regulation is welfare enhancing regardless of whether the foreign input provider uses linear or non-linear wholesale prices.     

International mergers: Incentives and welfare

Information asymmetry creates incentives for firms from different countries to merge. To demonstrate this point, we develop a model of international oligopolistic competition under demand uncertainty and asymmetric information. We show that when domestic firms but not foreign firms are completely informed of local market demands, information sharing enhances the profitability of a merger between a domestic firm and a foreign firm. We also examine how such a merger affects the non-merging firms' profits, consumer surplus and social welfare.     

Posted price and name-your-own-price in a product line design problem

In this research, we address Name your own price (NYOP) as a mechanism to offer products with transparent, rather than opaque, quality levels. We compare posted price (PP) and NYOP in a product line design problem from a firm’s viewpoint. We first consider the firm offering two vertically differentiated products that each can be priced by NYOP or PP. The quality level of products is considered either as a decision variable or as a fixed predetermined value for the firm. A customer correspondingly decides which product to purchase and if applicable, the bid at NYOP. We characterize both the customer’s and the firm’s decisions under four possible pricing scenarios. The results show that, it is most profitable for the firm to use PP for both products. We then consider if each product is offered by a competitive firm, where quality levels might again be decision variables or fixed. Results show that both competitive firms prefer PP to NYOP when they can create quality differentiation. The firm that offers the product with a lower quality level prefers PP to NYOP for all combinations of fixed quality levels as well. The other firm, with a higher quality level, also usually prefers PP to NYOP; However, it can be better off using NYOP when fixed quality levels are large and close enough to each other. In this case, the preference of NYOP over PP increases as customers’ willingness to pay enhances.     

Is certification an effective legitimacy strategy for foreign firms in emerging markets?

This study explores the effect of certification on profitability in a transition economy. Obtaining a certification is a strategic legitimacy action that positively affects a firm’s profitability, specifically for a foreign firm in a transition economy, where institutions are less developed and stable. However, we argue that certification is particularly effective if legitimacy based on adaptation to local circumstances is weak. An analysis of data from 319 MNE subsidiaries in China over the period 1998–2009 largely supports our hypotheses. Certification is an effective strategic action which improves profitability. However, the strength of this effect is influenced by the level of marketization of the host region, the institutional quality in the home country, the density of the foreign firm community in the host country, the number of years the foreign firm has been in the host country, and the size of the foreign firm. These findings throw light on the role certification can play in helping firms overcome the liability of foreignness in a transition economy.     

The effect of exogenous product familiarity on endogenous consumer search

When a consumer is familiar with one product but not its competitor, she is faced with a decision: either buy what she knows, or engage in search to learn more. When search is costly, competing firms may attempt to encourage or discourage search by adjusting prices. In this paper we consider how competitive dynamics between two quality differentiated firms are affected if one product enjoys a familiarity advantage. Familiarity is defined as a consumer’s ex-ante knowledge of fit for a particular product. An increase in the level of familiarity for one product allows a firm to charge higher prices since there are more consumers with information on that product relative to the competition. We call this the direct effect of familiarity. However, an increase in familiarity also has an indirect effect, since it gives the rival firm a stronger incentive to decrease price in order to encourage searching, in turn increasing overall competition. The effect of familiarity on profits depends on the magnitudes of these effects, and it is moderated by the level of quality differentiation between products. For very high or very low levels of differentiation, the results are relatively straightforward. However, when the level of differentiation is moderate, the results are more nuanced, with the higher-quality firm realizing higher profits from more familiarity, even if it must lower prices due to the indirect effect. We also find that, contrary to conventional wisdom, overall competition may be higher when firms are more quality differentiated. This is driven by the fact that higher quality differences bolster the indirect effect, with a lower quality firm providing deeper price cuts to counter increased familiarity of a high quality rival. We conclude by examining how changes in the cost of searching impact equilibrium outcomes.

     

Why do within‐firm–product export prices differ across markets? Evidence from Hungary

In this study, we analyse the relationship between distance and f.o.b. export unit values using firm–product–destination data from Hungarian manufacturing. Using 10‐digit Harmonized System data, we show that a doubling of distance is associated with about 7.5 per cent increase in the average product‐level price, from which five percentage points can be attributed to within‐firm–product variation. We run a number of tests to look for heterogeneity in this pattern. Interestingly, the measured effect is very similar for domestic and foreign firms but distance seems to matter somewhat more for EU countries than outside the EU. We do not find much evidence for heterogeneity across product categories based on measures of vertical differentiation. The level of product aggregation matters; the distance coefficient is larger when products are aggregate to the eight or six‐digit level.     

金融危机背景下贸易保护政策有效性检验——基于人工神经网络的系统仿真视角

国际金融危机愈演愈烈,贸易保护主义暗潮涌动,政府当何去何从?文章在人工神经网络和系统仿真技术支持下模拟出双寡头企业的市场演化,从多个视角对两大传统贸易保护政策工具——关税和配额的经济效应进行了检验。结果表明:随着进口限制越发严格,进口商品和国货价格同时上升,消费者剩余明显下降,国内产业利润有所提高,国外利润显著减少,世界总福利因此大幅下降,但伴随国内外产品质量趋同,进口限制对世界总福利的损害有所降低。另外,当国货质量较低时,国内总福利随配额的减少而降低;当国货质量较高时,国内总福利随配额的减少而提高。     

What makes a successful exporter? An introduction

The papers in this issue continue with the tradition of adding puzzles pieces to the overall picture of the impact and importance of firm international activities. In "What makes a successful exporter?", we have collected twelve papers, the majority of which were presented at the 13th annual ISGEP workshop in Ljubljana, Slovenia on 20–21 September 2018. The common thread linking these papers is that they explore both what it means to be an exporter and the ramifications of exporting on firms and the economy as a whole. On the one hand, this special issue addresses the role of foreign sourcing, export experience in the board of directors and credit supply shocks on the propensity to export, as well as the factors that affect firms' overall readiness to export. On the other hand, it investigates various measures of performance in the export markets, such as export duration, markups, quality upgrading and product mix.