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Foreign Entry and Domestic Welfare: Can "Market Discipline" Be Excessive?

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  • Aditya Bhattacharjea

    (Delhi School of Economics)

Abstract

This paper examines the effects of foreign entry, in the form of either imports or direct foreign investment, into an oligopolistic market. It shows that foreign entry can reduce welfare relative to autarky unless at least some domestic firms exit, or unless the foreign firms capture a very large share of the home market. However, it also shows that an optimal tariff can prevent this welfare decline. The paper concludes with some suggestive empirical evidence, and implications are drawn for trade and investment liberalization, as well as for domestic and international competition policy.

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Bibliographic Info

Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 83.

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Length: 20 pages
Date of creation: Jul 2000
Date of revision:
Handle: RePEc:cde:cdewps:83

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Related research

Keywords: Entry; foreign investment; tariff; oligopoly; strategic trade policy.;

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References

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  1. Denicolo, Vincenzo & Garella, Paolo G, 1999. "Market-Share Import Restraints in Oligopoly," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 732-43, November.
  2. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, Elsevier, vol. 15(3-4), pages 313-321, November.
  3. Ann Harrison & Gordon Hanson, 1999. "Who Gains from Trade Reform? Some Remaining Puzzles," NBER Working Papers 6915, National Bureau of Economic Research, Inc.
  4. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  5. Reitzes, James D & Grawe, Oliver R, 1999. "Entry Policy and Entry Subsidies," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 715-31, November.
  6. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 605-618, June.
  7. Martin Richardson, 1998. "Foreign entry and domestic welfare," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 134(2), pages 250-262, June.
  8. Paul E. Jensen & Kala Krishna, 1996. "Entry Policy in an Open Economy," Indian Economic Review, Department of Economics, Delhi School of Economics, Department of Economics, Delhi School of Economics, vol. 31(1), pages 41-56, January.
  9. Bhattacharjea, Aditya, 1995. "Strategic tariffs and endogenous market structures: Trade and industrial policies under imperfect competition," Journal of Development Economics, Elsevier, Elsevier, vol. 47(2), pages 287-312, August.
  10. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(2), pages 185-99, May.
  11. Seade, Jesus K, 1980. "On the Effects of Entry," Econometrica, Econometric Society, Econometric Society, vol. 48(2), pages 479-89, March.
  12. Keith Head & John Ries, 1997. "International Mergers and Welfare under Decentralized Competition Policy," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 30(4), pages 1104-23, November.
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Cited by:
  1. Aditya Bhattacharjea, 2001. "Import Quotas, Export Promotion and Intra-Industry Trade," Working papers, Centre for Development Economics, Delhi School of Economics 96, Centre for Development Economics, Delhi School of Economics.

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