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Critical import supply elasticities and the ‘imports-as-market-discipline’ hypothesis

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  • Zimmerman, Paul R.
  • Carlson, Julie A.

Abstract

This paper formally examines the factors underlying how responsive imports must be to domestic prices (the ‘import supply elasticity’) in order to thwart an anticompetitive domestic price increase stemming from a merger––an issue that frequently arises in many antitrust reviews. Domestic firms face a fringe comprised of foreign firms who import their products into the domestic market. In the eyes of domestic consumers, these imports are viewed as imperfect substitutes in demand to the output produced by the domestic firms. The model is solved in terms of the ‘critical’ import supply elasticity that can then be used evaluate the ability of imports to constrain an anticompetitive price increase post-merger. Both general and linear demand specifications are considered. Numerical simulations are conducted to consider the magnitude of perturbations in the model’s exogenous parameters. Potential empirical extensions of the model are also considered.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27848.

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Date of creation: 30 Dec 2010
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Handle: RePEc:pra:mprapa:27848

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Related research

Keywords: Competitive effects; Critical loss; Market definition; Import supply elasticity;

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References

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  1. Pugel, Thomas A, 1980. "Foreign Trade and US Market Performance," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 29(2), pages 119-29, December.
  2. Martha Field & Emilio Pagoulatos, 1998. "Foreign trade elasticities and import discipline," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 30(1), pages 105-111.
  3. Danger, K. & Frech, H.E.III., 2001. "Critical Thinking about "Critical Loss" in Antitrust," Papers, U.S. Department of Justice - Antitrust Division 01-4, U.S. Department of Justice - Antitrust Division.
  4. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, Elsevier, vol. 35(1-2), pages 1-22, August.
  5. Goldstein, Morris & Khan, Mohsin S, 1978. "The Supply and Demand for Exports: A Simultaneous Approach," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 275-86, May.
  6. John Kwoka, 1998. "Herfindahl Concentration with an Import Fringe and with Supply Constraints," Review of Industrial Organization, Springer, Springer, vol. 13(4), pages 401-407, August.
  7. de Ghellinck, Elisabeth & Geroski, Paul A & Jacquemin, Alexis, 1988. "Inter-industry Variations in the Effect of Trade on Industry Performance," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 37(1), pages 1-19, September.
  8. Katics, Michelle M & Petersen, Bruce C, 1994. "The Effect of Rising Import Competition on Market Power: A Panel Data Study of U.S. Manufacturing," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 42(3), pages 277-86, September.
  9. Thompson, Aileen J., 2002. "Import competition and market power: Canadian evidence," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 13(1), pages 40-55, May.
  10. C. Huveneers, 1981. "Price Formation and the Scope for Oligopolistic Conduct in a Small Open Economy," Discussion Papers (REL - Recherches Economiques de Louvain), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 1981032, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  11. Jacquemin, Alexis & de Ghellinck, Elisabeth & Huveneers, Christian, 1980. "Concentration and Profitability in a Small Open Economy," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 29(2), pages 131-44, December.
  12. Turner, Philip P, 1980. "Import Competition and the Profitability of United Kingdom Manufacturing Industry," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 29(2), pages 155-66, December.
  13. Ghosal, Vivek, 2002. "Potential foreign competition in US manufacturing," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 20(10), pages 1461-1489, December.
  14. Clark, Don P & Kaserman, David L & Mayo, John W, 1990. "Barriers to Trade and the Import Vulnerability of U.S. Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 38(4), pages 433-47, June.
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