International Trade, Upstream Market Power, and Endogenous Mode of Downstream Competition

John Gilbert, Onur Koska and Reza Oladi

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: In a trade model with both horizontal and vertical product differentiation, we analyze the implications of upstream market power for the endogenous mode of downstream competition. We show that when high-quality exports are manufactured under large frictions due to upstream monopoly power, the exporter can become a Bertrand competitor against a Cournot local rival in equilibrium, especially when the relative product quality of the foreign variety is sufficiently high and trade costs are sufficiently low (implying higher input price distortions due to double marginalization). We also show that the availability of FDI as an alternative to trade can make strategic asymmetry even more likely, especially when both input trade costs and fixed investment costs are sufficiently low and trade costs in final goods are sufficiently large. Our results show that strategic asymmetry is welfare improving and has important implications for both trade and FDI policy.

Keywords: International trade; upstream market power; vertical product differentiation; horizontal product differentiation; Cournot-Bertrand-Nash equilibrium (search for similar items in EconPapers)
JEL-codes: D43 F12 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2020-12-01
New Economics Papers: this item is included in nep-com and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repec.canterbury.ac.nz/cbt/econwp/2022.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:20/22

Access Statistics for this paper

More papers in Working Papers in Economics from University of Canterbury, Department of Economics and Finance Private Bag 4800, Christchurch, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by Albert Yee ().