International Duopoly Model Research Articles

FDI and quality-enhancing technology spillovers

When Northern firms undertake FDI in the South, their superior technology spills over to Southern firms and enables Southern firms to enhance their product quality. This paper explores quality-enhancing technology spillovers in an international duopoly model of vertical product differentiation. We find that the Northern firm strategically reduces its product quality to limit the amount of technology spillovers upon FDI. The trade-off between the Northern firm’s endogenous product quality choice and technology spillovers—similar to that between R&D and technology spillovers as discussed previously–plays a critical role in welfare consequences and policy implications of quality-enhancing technology spillovers.

Noncooperative and Cooperative International Product R&D with Spillovers

This paper analyzes and compares the equilibrium levels of R&D expenditures, product quality, output, price, consumer surplus, and profit of a firm from noncooperative and cooperative product R&D games. This is done using an international duopoly model in which two firms produce differentiated products and compete in a third country’s market. It is shown that in a symmetric equilibrium: (i) R&D expenditure (hence, also the quality) and output are higher in a cooperative R&D game than a noncooperative game if R&D spillovers are strong, or the goods are sufficiently differentiated, except with no spillovers, and the results are reversed if R&D spillovers are weak, or the goods are not too differentiated and R&D spillovers are quite small; (ii) prices are the same in noncooperative and cooperative R&D games; (iii) consumer surplus in the third country is lower in a cooperative R&D game than a noncooperative game; and (iv) profit of each firm, and hence aggregate profit, is lower in a cooperative R&D game than a noncooperative game if R&D spillovers are strong, or the goods are sufficiently differentiated, except with no spillovers, and the results are reversed if R&D spillovers are weak, or the goods are not too differentiated and R&D spillovers are quite small.

Cooperation and Competition in International Product R&D

This paper analyzes the equilibrium level of product differentiation and aggregate welfare from non-cooperation and two different cooperation of product R&D in an international duopoly model. It is shown that: (i) The equilibrium level of product differentiation in harmonization with product R&D is higher than that in R&D competition; (ii) The equilibrium level of product differentiation in harmonization with product R&D is higher than asymmetry with product R&D; (iii) The equilibrium level of product differentiation in R&D competition is higher than asymmetry with product R&D; (iv) If transport cost is sufficiently high, aggregate welfare in R&D competition is higher than that of harmonization with product R&D; (v) If transport cost is sufficiently high, aggregate welfare in asymmetry with product R&D is higher than that of harmonization with product R&D; and (vi) If transport cost is sufficiently high, aggregate welfare in asymmetry with product R&D is higher than that in R&D competition.

Rules of origin and technology spillovers from foreign direct investment under international duopoly

Using a simple three-country model of international duopoly, this study analyzes the optimal choice of rules of origin (ROO) in a free trade area/agreement (FTA) when firms from outside the FTA must undertake foreign direct investment (FDI) in FTA countries and conduct part of their production process within the FTA to comply with the ROO. FDI causes spillovers of the superior production technology from a non-FTA firm to its competitor within the FTA, depending on how much of the production process is shifted to the FTA area. In this situation, this study predicts that as the degree of multilateral trade liberalization before formation of the FTA is higher, the optimal ROO tends to be less stringent.

Trade liberalization and aftermarket services for imports

We analyze the provision of repair services (aftermarket services that are required for a certain fraction of durable units after sales) through an international duopoly model in which a domestic firm and a foreign firm compete in the domestic market. Trade liberalization in goods, if not accompanied by the liberalization of foreign direct investment (FDI) in services, induces the domestic firm to establish service facilities for repairing the foreign firm’s products. This weakens the firms’ competition in the product market, and the resulting anti-competitive effect hurts consumers and reduces world welfare. Despite the anti-competitive effect, trade liberalization may also hurt the foreign firm because the repairs reduce the sales of the imported good in the product market. Liberalization of service FDI helps resolve the problem because it induces the foreign firm to establish service facilities for its own products.

Trade Liberalization and Aftermarket Services for Imports

We analyze the provision of repair services (aftermarket services that are required for a certain fraction of durable units after sales) through an international duopoly model in which a domestic firm and a foreign firm compete in the domestic market. Trade liberalization in goods, if not accompanied by the liberalization of service FDI, induces the domestic firm to establish service facilities for repairing the foreign firm's products. This weakens the firms' competition in the product market, and the resulting anti-competitive effect hurts consumers and reduces world welfare. Despite the anti-competitive effect, trade liberalization may also hurt the foreign firm because the repairs reduce the sales of the imported good in the product market. Liberalization of service FDI helps resolve the problem because it induces the foreign firm to establish service facilities for its own products.

Wage Subsidies and International Trade: When Does Policy Coordination Pay?

Abstract National labour market institutions interact across national boundaries when product markets are global. Labour market policies can thus entail spill-overs, which suggest that there are benefits from international policy coordination. This paper studies the effects of wage subsidies in an international duopoly model with unionized labour markets. The authors document both positive and negative spill-over effects and discuss the benefits and costs from international policy coordination both for the case of symmetric and asymmetric labour market institutions. The results suggest that institutional differences could sign responsible for the slow speed at which labour market policy coordination has progressed so far.

The Impact of Unilateral Climate Policy with Endogenous Plant Location and Market Size Asymmetry

AbstractThis paper analyses the impact of unilateral climate policy on firms' international location strategies in emission‐intensive sectors, when countries differ in terms of market size. The cases of both partial and total relocation via foreign direct investment are separately considered. A simple international duopoly model highlights the differences between short‐term and long‐term effects. In the short‐term no change in location is a likely outcome in very capital‐intensive sectors and, when there is a strategy shift, this takes the form of partial rather than total relocation. In the long‐run total relocation becomes a feasible outcome. However, when tighter mitigation measures are introduced by the larger country and unit transport cost is high, with a pronounced market asymmetry, the probability of firms not relocating abroad is high even in the long‐term. The welfare implications of unilateral environmental measures are assessed considering global industrial pollution and accounting for shifts in location strategy.

FDI and Technology Spillovers Under Vertical Product Differentiation

When Northern firms undertake FDI in the South, the superior technology they bring to their Southern operations spills over to Southern firms. Technology spillovers accompanied by FDI often enable Southern firms to enhance their product quality. This paper explores a model that incorporates quality-enhancing spillovers in an international duopoly model of vertical product differentiation. We find that the Northern firm, when it chooses to undertake FDI, strategically reduces its product quality to reduce the amount of technology that spills over to the Southern firm. This strategic quality reduction, which is often observed in reality, plays a critical role in welfare consequences and policy implications of quality-enhancing technology spillovers.

Wage Subsidies and International Trade: When Does Policy Coordination Pay?

National labour market institutions interact across national boundaries when product markets are global. Labour market policies can thus entail spill-overs, which suggests that there are benefits from international policy coordination. This paper studies the effects of wage subsidies in an international duopoly model with unionised labour markets. The authors document both positive and negative spill-over effects and discuss the benefits and costs from international policy coordination both for the case of symmetric and asymmetric labour market institutions. The results suggest that institutional differences could sign responsible for the slow speed at which labour market policy coordination has progressed so far.

Network externalities, transport costs, and tariffs

This article formulates a reciprocal market model of international duopoly with network externalities to reconsider welfare effects of reductions in transport costs and tariffs. Depending on the magnitude of network externalities, we show two possibilities. One of them, which emerges under strong network externalities, illustrates that freer trade unambiguously improves welfare for any initial level of trade barriers. This finding provides an affirmative evaluation of freer trade.

Strategic Trade Policy with Endogenous Product Differentiation

In this paper I develop a model of international duopoly, where firms invest in product differentiation. I show that firms have an incentive to free-ride on the investment of their rival, due to an externality generated by product differentiation. A further effect of product differentiation is the market-expansion effect, which induces consumers to increase their aggregate spending in the market. Depending on the strength of the two effects, the investments are either strategic substitutes or strategic complements. I link this result to strategic trade policy and show that the optimal policy depends on the strength of the market-expansion effect.

ENVIRONMENTAL POLICY AND TRADE LIBERALIZATION: THE CASE OF TRANSBOUNDARY POLLUTION FROM CONSUMPTION

This paper develops a reciprocal market model of international duopoly with transboundary pollution from consumption to examine the effects of bilateral tariff reductions on the equilibrium pollution tax and welfare. I show that tariff reductions induce each country to raise an emission tax and that trade liberalization is welfare improving if the parameter of pollution damages is sufficiently large. These results are in contrast to the case of production-generated pollution, and I seek the reason for this contrast.

Airport Privatization and International Competition

We provide a simple theoretical model to explain the mechanism whereby privatization of international airports can improve welfare. The model consists of a downstream (airline) duopoly with two inputs (landings at two airports) and two types of consumers. The airline companies compete internationally. Using the simple international duopoly model, we show that the outcome where both airports are privatized is always an equilibrium while that where no airport is privatized is another equilibrium only if the degree of product differentiation is large.

Effects of Transboundary Stock Pollution on the Mode of International Competition

This paper looks into potential determinants of the mode of international competition in a polluting good market by focusing on a strategic interaction between two environmentally concerned governments. From the analysis of our model based on a simple international duopoly model with transboundary stock pollution, we show how the resulting form of international competition depends on the magnitudes of the transboundary impacts of pollutant emissions and the decay rates of pollutant stocks in respective countries.

FDI in post-production services and product market competition

Post-production services, such as sales, distribution, and maintenance, comprise a crucial element of business activity. We explore an international duopoly model in which a foreign firm has the option of outsourcing post-production services to its domestic rival or providing those services by establishing its own facilities through FDI. We demonstrate that trade liberalization in goods may hurt domestic consumers and lower world welfare, and that the negative welfare impacts are turned into positive ones if service FDI is also liberalized. This finding yields important policy implications, given the reality that the progress of liberalization in service sectors is still limited.

The Impact of Unilateral Climate Policy with Endogenous Plant Location and Market Size Asymmetry

This paper analyses the impact of unilateral climate policy on firms’ international location strategies in emission-intensive sectors, when countries differ in terms of market size. The cases of partial and total relocation via foreign direct investment are separately considered. A simple international duopoly model highlights the differences between short-term and long-term effects. In the short-term no change in location is a likely outcome in very capital-intensive sectors, and when there is a strategy shift this takes the form of partial instead of total relocation. In the long-run total relocation becomes a feasible outcome. However we found that, when tighter mitigation measures are introduced by the larger country and unit transport cost is high, with a pronounced market asymmetry the probability of firms not relocating abroad is high even in the long-term. The welfare implications of unilateral environmental measures are assessed considering global industrial pollution and accounting for shifts in location strategy.

Oligopoly, open shop unions and trade liberalisation

In an international duopoly model, we investigate how trade liberalisation impacts on collective bargaining outcomes when workers are represented by open shop unions. We find that, with intermediate levels of union density, trade liberalisation may lead to higher negotiated wages even if no trade occurs in equilibrium. In addition, we show that union wages may be higher with free trade than in autarky.

FDI in Post-Production Services and Product Market Competition

Post-production services, such as sales, distribution, and maintenance, comprise a crucial element of business activity. A foreign firm faces a higher cost to perform such services than its domestic rival because of the lack of proximity to customers. We explore an international duopoly model in which a foreign firm can reduce its cost for post-production services by foreign direct investment (FDI), or alternatively can outsource such services to its domestic rival. Trade liberalization, if not accompanied by liberalization of service FDI, can hurt domestic consumers and decrease world welfare, but the negative welfare impacts can be mitigated and eventually turned into positive ones as service FDI is also liberalized. This finding yields important policy implications, given the reality that the progress of liberalization in service sectors is limited compared to the substantial progress already made in trade liberalization.

Feasibility of FTA/EPA and Timing of Trade Policy

This paper examines the feasibility of FTA/EPA in a three-country international duopoly model where one importing country and two identical exporting countries exist, and where each government may implement an import tariff and an export subsidy as trade policies. In this paper, FTA is defined as the elimination of export subsidy and import tariff among member countries, and EPA is defined as the elimination of such trade policies among member countries and the income transfer as an economic cooperation among member countries. The main conclusions are as follows. [i] The FTA between an importing country and an exporting country is not formed irrespective of the timing of trade policy, whereas the EPA is formed under specific conditions when the timing of trade policy is simultaneous. [ii] If the EPA between the importing country and the exporting country is formed, the EPA benefits a non-member exporting country and increases world welfare. [iii] The welfare of the importing country (of the exporting countries) is greater (less) than that in free trade even though world welfare is at the same level as in free trade.JEL Classification: F12, F13, L13