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Entry Preemption by Domestic Leaders and Home-Bias Patterns: Theory and Empirics

Author

Listed:
  • Alfaro, Martin

    (University of Alberta, Department of Economics)

Abstract

This paper studies a mechanism which arises through the strategic use of demand-enhancing investments by domestic leaders. To accomplish this, I develop a parsimonious framework that allows for firm heterogeneity, strategic interactions, multiple choices, and extensive margin adjustments. The mechanism is such that, relative to a non-strategic benchmark, domestic leaders follow an overinvestment strategy which preempts the entry of importers and increases their domestic sales. This generates greater concentration and home-bias patterns at both the firm and aggregate level. The results are robust to the type of competition (i.e., prices or quantities) and whether investments trigger increases or decreases in prices. Estimating the model for Danish manufacturing industries, I show that, in industries with lower substitutability, the strategic effect on concentration and domestic intensity is greater for consumer goods, and lower regarding concentration for producer goods.

Suggested Citation

  • Alfaro, Martin, 2019. "Entry Preemption by Domestic Leaders and Home-Bias Patterns: Theory and Empirics," Working Papers 2019-13, University of Alberta, Department of Economics.
  • Handle: RePEc:ris:albaec:2019_013
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    File URL: https://sites.ualberta.ca/~econwps/2019/wp2019-13.pdf
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    More about this item

    Keywords

    domestic leaders; demand-enhancing investments; preemption; concentration; home bias;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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