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Domestic Welfare Effects Of The Entry Of A Foreign Firm

  • ILLTAE AHN

    ()

    (Chung-Ang University)

  • HYUKSEUNG SHIN

    (Sookmyung Womens' University)

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    The entry of a foreign firm has two counterbalancing effects on domestic social welfare. As the competition level in the domestic market increases by the entry, domestic incumbent firms' outputs and profits decrease. On the other hand, the price goes down and thus consumers' surplus increases. Therefore, the effect of the entry of a foreign firm on domestic social welfare is determined by the relative size of these two opposite effects. By investigating this trade-off, we identify domestic market characteristics and types of foreign entrant that are likely to affect domestic social welfare positively. Our main findings can be summarized as follows. First, a foreign firm's entry is less(more) likely to improve domestic social welfare as the pre-entry overall efficiency level of domestic market is higher(lower). Second, the foreign entrant should be more efficient than domestic firms. Otherwise, domestic social welfare decreases.

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    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 37 (2012)
    Issue (Month): 2 (June)
    Pages: 35-57

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    Handle: RePEc:jed:journl:v:37:y:2012:i:2:p:35-57
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    1. Bertrand Crettez & Marie-Cécile Fagart, 2008. "Does entry improve welfare? A general equilibrium approach to competition policy," EconomiX Working Papers 2008-14, University of Paris West - Nanterre la Défense, EconomiX.
    2. 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.
    3. C.C. von Weizsaker, 1980. "A Welfare Analysis of Barriers to Entry," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 399-420, Autumn.
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