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

Martin Alfaro

No 2019-13, Working Papers from 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.

Keywords: domestic leaders; demand-enhancing investments; preemption; concentration; home bias (search for similar items in EconPapers)
JEL-codes: F12 F14 L13 L60 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2019-09-06
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2019_013

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