Final Goods Market Research Articles

Oligopoly and oligopsony in international trade

AbstractWe study the effects of international trade on the oligopsony power of firms in input markets. We build a theoretical model of international trade in which firms are oligopolists in the market for final goods and oligopsonists in the market for inputs. Consistent with evidence from the literature, firms' markups over unit costs rise with the level of oligopsony power and of oligopoly power. While trade liberalization decreases market power in one market, it has the opposite effect in the other. In particular, international competition between oligopolists in final goods markets causes oligopsony power to increase and oligopoly power to decline. In a simulation, we show that the increase in oligopsony power can more than offset the reduction in oligopoly power, resulting in a net increase in markups over unit costs.

Mergers of complements, endogenous product differentiation and welfare

The static analysis shows that a merger among complementary input suppliers or complementary patent holders benefits the consumers and the society by reducing the input prices. We show that the effects of a merger of complements are not so straightforward in a dynamic set up with endogenous product differentiation in the final goods market. The merger of complements reduces the total input prices and increases product differentiation. However, whether it increases or decreases consumer surplus and welfare depends on the market expansion following product differentiation, the number of merged input suppliers and the intensity of competition. Hence, in a dynamic setup with endogenous product differentiation, the antitrust authorities may need to be more careful about mergers of complements. Our analysis has also relevance for vertical mergers.

Technology sharing incentives for monopolistic firms

ABSTRACT The present study theoretically examines the effects of free technology sharing by a monopolistic final-goods firm with other final-goods firms. I consider two cases: first, where there exists one final-goods firm in the final-goods market and second, where there exist two final-goods firms in the final-goods market. Given the free entry of firms into the differentiated intermediate-goods market, the results show that when another firm enters the final-goods market and transforms it into a two-firm oligopoly, cost efficiency improves because of an increase in the number of intermediate-goods firms. Furthermore, there is a possibility that the incumbent firm’s profits increase not only for a two-firm oligopoly, but also for an oligopoly with three or more firms. Thus, this study concludes that free technology sharing can improve incumbent firms’ profits. When the impact of an increased number of firms entering the intermediate-goods sector on the final good’s unit cost is high, free technology sharing benefits incumbent firms’ profits. While some prior studies show the potential for firms to increase their profits through licencing and the provision of technology, this study considers that technology is shared free of charge in an economy where the number of differentiated intermediate-goods firms is endogenously determined.

Public utility ownership and in-kind trade policy in vertically related markets

This analysis examines the optimal government ownership level of an upstream public utility when considering an import tariff and a production subsidy. It analyzes a simple two-country model in which a home public and a foreign private utility firm in the upstream market supply their produced inputs exclusively to compatriot downstream firms that compete in the home country's final good market. The paper shows various conditions for determining the optimal level of government public utility ownership and the role of that ownership. If the import tariff and production subsidy are sufficiently small (or large), then the optimal government ownership policy will likely be complete (or partial) nationalization, and the ownership of the home public utility works as an in-kind subsidy to (or tax on) the home downstream firm. The analysis also examines a case where the home downstream firm monopolizes the market. It shows that the optimal policy is the complete nationalization of the upstream public utility. The World Trade Organization (WTO) limits the direct use of tariffs and subsidies as a strategic trade policy tool. Under such a situation, this paper suggests that government ownership of a public utility can be used as an in-kind trade policy tool, and privatizing without considering this role of public utilities may neglect a potentially useful trade policy channel.

Losses from cross-holdings in a duopoly with convex cost and strategic input price determination

It is well-known that positive output externality on the outside firms is the reason for unprofitable passive cross-holding, which refers to a situation where a producer holds non-controlling shares in rival firms. Considering a final goods market with Cournot duopoly, where cross-holdings do not create positive output externality on the outside firms, we show that cross-holdings can be unprofitable under strategic input price determination by an input supplier if the final goods are produced with decreasing returns to scale technologies. Our results hold under symmetric and asymmetric cross-holdings. We show that cross-holdings can be unprofitable also under Bertrand duopoly in the final goods market. Thus, we provide a new reason for unprofitable passive cross-holdings. We also show the implications of a higher product differentiation on the profits and welfare.

How does oil price volatility affect unemployment rates? A dynamic stochastic general equilibrium model

Although empirical evidence reveals a strong correlation between oil price volatility and unemployment, the transmission mechanism of these two variables is unclear. We theoretically examine the effects of oil price uncertainty shocks on the unemployment rate using a dynamic stochastic general equilibrium model incorporating a search-and-match component. We find that an unexpected increase in oil price volatility leads to a persistent increase in the unemployment rate. Comparing the oil price uncertainty shock with supply and demand uncertainty shocks in the final goods market, we observe that the oil price uncertainty shock has effects analogous to those of the supply uncertainty shock. In addition, we demonstrate that oil as a production input mitigates the adverse effects of uncertainty shocks to supply and demand sides of final goods market.

Organizational Structure and Technological Investment*

We analyze firms’ decisions on their vertical organization, taking into account the characteristics of both the final good competition and the R&D process. We consider two vertical chains where upstream sectors invest in R&D. Such investment determines the production costs of the downstream sector and has spillovers on the production and the investment costs of the rival. In a general setting, we show that the equilibrium organizational structure depends on whether the situation considered belongs to one of four possible cases. We study how final good market competition, R&D spillover, and R&D incentives interact to determine the equilibrium vertical structure.

Institutional Quality, FDI, and Productivity: A Theoretical Analysis

While many important links between institutional quality and foreign direct investment (FDI) inflows and/or between inward FDI and economic development through productivity growth have been uncovered, the full links between emerging and advanced economies are not yet well understood. This paper develops a model of FDI with an explicit distinction between the two economies where domestic and multinational firms using different technologies compete on the final good market and highlights the institutional quality–FDI–productivity link within a unified theoretical general equilibrium framework. We show that an improvement of institutional quality in the emerging economies induces pervasive technology-upgrading effects in the advanced economies, which generates aggregate productivity gains.

Learning by supplying and competition threat

This study proposes a model of learning by supplying in an international outsourcing framework, where the supplier of a relationship-specific input can reverse engineer and become a competitor to its partner in the final goods market. Transmitting knowledge to a more capable supplier therefore creates competitive threat despite the benefits it brings within an outsourcing relationship. In particular, in markets with less differentiated products and for standard inputs that require less knowledge to be shared, choosing an intermediate capability level supplier prompts a strategic expansion of output to deter supplier entry in the final goods market, resulting in higher profits and welfare. A highly capable supplier is instead accommodated as a rival and is a source of royalty income when the relationship-specific input embeds more knowledge about the final product and when the competing varieties are differentiated.

Competition and the racial wage gap: Evidence from Brazil

We look at the natural experiment represented by the Brazilian trade liberalization from the early 1990s to study the effect of increased competition in the market for final goods on the racial wage gap. We focus on local labor markets as the unit of analysis and use the initial structure of employment to calculate the relevant tariff reduction from the perspective of each local labor market. We show that the conditional racial wage gap fell more between 1991 and 2000 in regions associated with larger reductions in tariffs, or, in other words, in regions that experienced larger increases in exposure to international competition. A reduction in tariffs equivalent to the average observed in the sample was associated with a reduction in the racial wage gap of 18%. Our results are broadly consistent with theories of employer discrimination that predict that reductions in pure economic rents should lead to reductions in labor market discrimination.

Social efficiency of entry in a vertically related industry revisited

We revisit the social desirability of entry in a vertical structure by showing that, if the input supplier has market power, social desirability of entry of downstream producers depends on the asymmetric marginal costs among competing firms. Under constant returns to scale, entry in the final goods market can be socially insufficient when entrants are inefficient, but it can be socially excessive if the cost of entrants is sufficiently low compared to the incumbents.

Fixed fee discounts and Bertrand competition in vertically related markets

We show that Bertrand competition arises in equilibrium in the downstream market of a vertically related industry with bottleneck. The upstream monopolist offers fixed fee discounts to the downstream firms in order to motivate them to set prices , instead of quantities, in the final good market. This is in sharp contrast with the bulk of the literature in which Cournot competition is the equilibrium mode of competition. Bertrand competition is beneficial for all firms, but not for consumers and the society.

Organizational structure and technological investment

We analyze firms' decisions on their vertical organization, taking into account the characteristics of both the final good competition and the R&D process. We consider two vertical chains, where upstream sectors invest in R&D. Such investment determines the production costs of the downstream sector and has spillovers on the production and the investment costs of the rival. In a general setting, we show that the equilibrium organizational structure depends on whether the situation considered belongs to one of four possible cases. We study how final good market competition, R&D spillover, and R&D incentives interact to determine the equilibrium vertical structure.

The role of intermediate goods in international monetary cooperation

This paper investigates the implications of intermediate goods for optimal monetary policy in open economies, and particularly focuses on the welfare gains that result from monetary cooperation. In a relatively standard two-country dynamic stochastic general equilibrium model with input-output relations, this paper demonstrates that introducing intermediate goods can amplify the welfare gains caused by cost-push shocks by an order of magnitude larger. A detailed analysis of equilibrium dynamics highlights a new channel that is absent in the previous literature: non-cooperative central banks respond differently to shocks in the intermediate goods market versus shocks in the final goods market, even if these shocks generate the same distortions when the two central banks cooperate. Furthermore, it is demonstrated that increasing the degree of openness in the intermediate goods market can reduce the welfare gains from monetary cooperation. This casts doubt on whether the recent trend in international economic integration justifies the potential need for international monetary cooperation.

Profit raising entry in a vertical structure

In contrast to the usual belief, we show that entry in the final goods market increases profits of the incumbent final goods producers if there is free entry in the input market and the final goods are sufficiently differentiated. Thus, we extend Matsushima (2006).

International recycling firm joint ventures and optimal recycling standards

In this paper, we consider a Southern economy consisting of an upstream duopoly market for recycled materials and a downstream perfectly competitive market for final goods. In our model, the Northern and Southern recyclers can form a joint venture (JV) if bargaining is successful. Then, if we assume that the marginal cost of the Southern recycler is higher than that of the Northern recycler, we obtain the following main results in the case where the JV is established. First, a stricter recycling standard decreases the Southern recycler’s share of profits from the JV, even though it increases its overall profit. Second, the recycling standard lowers the price of recycled materials and thus decreases the price of final goods. Third, if the Southern government sets the recycling standard optimally, the optimal standard in the JV may be lower than that in the monopoly of the Northern recycler. The optimal standard in the JV then falls lower with an increase in the marginal cost of the Southern recycler. Finally, if the Southern government sets the excise duty optimally, a stricter recycling standard might increase or decrease the optimal duty level. However, in the case of the JV, it will decrease the amount of waste even when the ex-ante recycling standard is low, as long as the market for final goods is large.

Does Labor-Saving R&D Hurt Labors?

In this paper, we consider a right-to-manage model with a monopolist in the final goods market. We investigate how the wage determination of labor union affects the firm’s Labor-Saving R&D strategy. We find that if the labor union determines a higher wage, the monopolist may not produce less output or undertake more R&D investments. Besides, we also find that if the firm undertakes Labor-Saving R&D, then the total gains of labor may not decrease.

The Role of Intermediate Goods in International Monetary Cooperation

This paper investigates the implication of intermediate goods on optimal monetary policy in open economies, and in particular, focusing on the welfare gains from monetary cooperation. In a relatively standard two-country dynamic stochastic general equilibrium model with input-output relations, I demonstrate that introducing intermediate goods can amplify the welfare gains caused by cost-push shocks by an order of magnitude larger. A detailed analysis on the equilibrium dynamics highlights a new channel that is absent in the previous literature: non-cooperative central banks respond differently to shocks in the intermediate goods market versus shocks in the final goods market, even if these shocks generate the same distortions when the two central banks cooperate. Furthermore, I find that increasing the degree of openness in the intermediate goods market can reduce the welfare gains from monetary cooperation. This casts doubt on whether the recent trend in international economic integration may justify the potential need for international monetary cooperation.

Collective exclusion

This paper studies collusion among vertically integrated incumbents who may either delegate output production to a more efficient downstream entrant (“accommodating regime”) or refuse to supply the entrant and produce the final good themselves (“exclusionary regime”). Accommodating agreements yield higher collusive profits, but suffer from contractual frictions: An incumbent may first offer the entrant a high wholesale price for the input, and then undercut the entrant on the final good market, so that the entrant cannot recover its high input costs downstream. When the efficiency gap between the incumbents and the entrant is small, this hold-up effect dominates over the efficiency effect. Depending on modeling choices, exclusionary collusion is then either more profitable than accommodation, or is the only sustainable collusive regime.

수평 차별화된 최종재 시장에서 요소가격차별의 후생효과

We analyze the welfare effect of input price discrimination in a horizontally differentiated final-goods market. Previous studies assuming downstream firms competing with homogeneous goods have shown that input price discrimination lowers social welfare by reducing production efficiency. On the other hand, Hahn and Kim(2018) recently showed that input price discrimination can improve social welfare by increasing consumption and production efficiencies when the final-goods market is vertically or horizontally differentiated and consumers have heterogeneous preferences for the products. In contrast, this paper shows that even if the final goods are spatially differentiated, input price discrimination always reduces social welfare as long as all consumers participate and the participation constraint is binding in the middle of the consumer distribution in equilibrium. This result highlights that the welfare effect of input price discrimination in the differentiated final-goods market critically depends on the type of consumer participation constraint, which provides useful implications for competition policy towards the third-degree price discrimination in intermediate-goods markets.