A Theory of International Strategic Alliance

As an alternative to exporting, a firm can enter a foreign market by forging a strategic alliance with its foreign counterpart. The alliance eliminates transportation costs and duplications in product distribution networks. At the same time, strategic alliance lessens competition between the firms so that it leads to smaller outputs and higher prices. The degree of lessening of competition depends on the firms’ ability to commit to output levels. In the case where the firms can credibly commit to output levels, the alliance effectively becomes a cartel, restoring prices to the monopoly level. On the other hand, if such commitment is not credible or not possible, prices will be lower than the monopoly level but will still be higher than that if firms had exported to each other's market directly. The welfare effects of the strategic alliance are in general ambiguous.