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The Effects of Entry in Oligopolistic Trade with Bargained Input Prices

Robin Naylor and Christian Soegaard ()
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Robin Naylor: University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: Firms which face the threat of import competition from foreign rivals are conventionally seen as favouring import protection. We show that this is not necessarily the case when domestic firms' input prices are determined endogenously. In a framework where the input price is determined through bargaining with an (upstream) input supplier, the relationship between a domestic (downstream) firm's profits and the number of foreign competitors depends on trade costs. If trade costs are sufficiently high, then an increase in the number of foreign entrants can raise the profits of a downstream firm in a home market characterised by Cournot competition. The intuition for this result is that increased product market competition through the entry of foreign firms is mirrored by profit-enhancing moderation of the bargained input price. We examine a number of tariff and non-tariff barriers to international trade and identify conditions under which import-competing firms will favour the removal of barriers to foreign competition.

Keywords: Oligopoly; international trade; profits; entry; vertical markets (search for similar items in EconPapers)
JEL-codes: F13 F16 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com and nep-int
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1148

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