The Welfare Effect of International Cost Harmonization
Cost harmonization is said to occur when foreign firms' marginal costs are brought closer or equalized to domestic firms' costs. It can occur for various reasons, ranging from foreign direct investment to falling transport cost and policy changes in the foreign country. In this paper we derive general welfare effects of cost harmonization that can be induced by any of these changes. Assuming Cournot oligopoly, we identify a number of situations in which cost harmonization, whether induced by rising or falling marginal costs for foreign firms, can reduce domestic welfare. We then apply the results to various cases and evaluate policy implications.
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