International Oligopoly Research Articles

Unionised dockworkers and port ownership structure in an international oligopoly

In an international duopoly with two markets and two ports, this paper investigates the role of dockworkers unionisation in determining the endogenous choice by governments of port ownership structure. While private ports maximise profits, public ports maximise domestic welfare and face a budget constraint, which is binding when unions are sufficiently wage-oriented and shipping costs are not too high. State-owned ports appear as the most likely equilibrium result although all possible configurations may arise in equilibrium, including an asymmetric structure with a state-owned port and a private port. Country size asymmetry, product differentiation and price competition in product markets favour the rise of a joint public ownership structure of ports. This structure also maximises domestic welfare when unions are wage-oriented.

Welfare effects of common ownership in an international duopoly

AbstractWe formulate an international oligopoly model in the presence of global common ownership. We theoretically investigate how common ownership affects the volume of international trade in an oligopoly market and global welfare. We find that welfare decreases (increases) with the degree of common ownership when the international transport costs are low (high), whereas common ownership reduces international trade. This conclusion remains valid in the presence of import tariffs and asymmetric common ownership share.

Globalization of markets and consumption home bias: new insights for the environment

AbstractWe propose a model of international oligopoly with two countries, two vertically-differentiated goods, and heterogeneous consumers in terms of their willingness to pay for quality. Various sources of pollution are taken into account: consumption, production and the transportation of goods between the two countries. Green persuaded consumers display consumption home bias: they derive additional satisfaction when consuming a domestic good because buying locally abates transportation pollution. We investigate whether consumption home bias effectively curbs global emissions. Finally, we uncover the environmental role played by the globalization of markets.

Choice of trade policy for international oligopoly with incomplete information

This paper studies the design of trade policies in an uncertain third market with incomplete information. Governments in each of the two countries select either direct quantity controls or export subsidies in an attempt to shift profits in favor of their firms in an international oligopolistic setting. It is shown that the country with firms having an information disadvantage tends to choose direct quantity control, while the country with well-informed firms would use export subsidy (export quota, respectively) when the degree of uncertainty is sufficiently high (low, respectively).

Merger incentives in an international oligopoly composed of Kantian optimization firms with differentiated goods

AbstractThis paper revisits horizontal mergers in an international oligopoly with differentiated goods under the segmented market assumption. In particular, we focus on an industry composed of firms that engage in their Kantian optimization. Strikingly from the case of each firm's Nashian optimization, we show that a duopoly with two international mergers can be uniquely observed in equilibrium except for a full monopoly, and the highest total social welfare can be achieved in its equilibrium market structure. In addition, we consider the managerial delegation cases from the viewpoints of two types of each firm's Kantian optimization.

Transportation price, product differentiation, and R&D in an oligopoly

In this article, we construct an international oligopoly that explicitly incorporates transporter behavior. In each country, there is one firm that produces differentiated goods and invests in product-differentiating R&D and one transporter that transports the differentiated goods. We adopt a three-stage game in which the firms decide their R&D investment level to determine the degree of horizontal differentiation, the transporters determine the transportation prices through Cournot competition, and then the firms determine the quantities of production. We find that an increase in R&D efficiency in the product differentiation of firms leads to a decrease in transportation prices. We also reveal that an increase in the efficiency of product differentiation always reduces the profits of firms. These results explain the empirically plausible long-term trend of declining transportation prices and also provide a counterintuitive implication that efficiency gains reduce the degree of product differentiation.

You can’t always get what you want: Protectionist policies with the transport sector

This paper incorporates key stylized facts about the transport sector into the conventional international oligopoly model and explores how protectionist policies perform differently when transport costs are endogenous and subject to the backhaul problem (i.e., the imbalance of shipping volume in outgoing and incoming routes). A country’s protectionist policies, which benefit domestic firms and harm foreign firms in the conventional model, can harm domestic firms and benefit foreign firms if carriers avoid the backhaul problem. Protectionist policies may also lead to a facilitating practice. In the absence of the backhaul problem, both domestic and foreign consumers lose from protectionist policies.

Bidding for tariff exemptions in international oligopolies

An advice IMF often gives to its members that open up their markets to trade is to reduce the level of tariffs and to simultaneously increase consumption taxes so as not to lose government revenues. In this paper, we introduce a novel way of reducing tariff rates without losing revenues and without relying on consumption taxes. We propose that the home government imposes a per unit (or ad valorem) tariff $$\tau $$ and also auctions off a number of tariff exemptions. The foreign firms that submit the highest bids acquire the exemptions and sell their products in the home market without paying $$\tau $$ . The remaining foreign firms, i.e., those who do not acquire exemptions, remain subject to it. We identify market conditions under which this mechanism generates higher revenues for the home government (in comparison with traditional tariff policies) and also higher total home welfare. Among other things, our analysis implies that if the government wants to collect revenues of magnitude $$T(\tau )$$ , it can do so by announcing a lower tariff rate $$\tau '<\tau $$ and by inviting the foreign firms to bid for tariff exemptions.

Using Legal Institutionalism in the Study of International Investment: Suggestions from the Expansion of Brazilian Multinational Corporations

This paper suggests that studies of FDI flows demand an examination of how multinational firms achieve legal status as corporations instead of how they use global governance and international regulation. Some sources have been investigating the impact of institutions in FDI flows, especially international business (IB) and international economic law (IEL)literatures. However,both of these literatures lack strong findings. Studies in IEL overemphasize the impact of bilateral investment treaties and investment arbitration to explain FDI, and rely on normative legal theories unsuitable to investigate causal links between legal institutions and FDI flows. In contrast, IB studies rely on methodologies suitable to find causality, but overemphasize the flow of FDI from developed to developing countries and face harsh criticism due to reliability problems. I suggest at least three central variables to assess how Brazilian firms have been achieving legal status as multinational corporations almost unexplored to date. These are: the approval of cross-border deals by the Brazilian antitrust authority;the financial support from the Brazilian Development Bank to outward FDI;and the subsidization of FDI in science and technology parks in Brazil.Investigating the impact of such variables onFDI outward Brazil demands a vision of law inspired in social science approaches to empirical research. Legal institutionalism approach inspires such methodology, when suggesting that legal institutions are necessary conditions to constitute markets,and contrasting the role of the rule of law and the private ordering.Therefore, corporations may be relying on the Brazilian rule of law to grant them legal status internationally, which provides them with ability to enforce cross-border agreements unconceivable before the 2000s. In contrast,another hypothesis is thatBrazilian multinational corporations are actually enforcing a private ordering system to keep dominant positions in their businesses and to create international oligopolies and/or monopolies.

Technology spillovers, intellectual property rights, and export-platform FDI

How do trade liberalization and changes in market size affect the strength of intellectual property rights (IPR) protection in Southern countries? We explore this question in an international oligopoly model in which a Northern firm has the option of export-platform FDI (EPF): that is, to set up an export platform in the South to serve not only the Southern market but also other export markets. EPF allows the Northern firm to take advantage of low tariffs that often exist between the South and other export markets. However, with imperfect protection of IPR in the South, the Northern firm’s technological advantage is reduced under EPF as technology spills over, at least partially, to Southern firms. We show that when trade between the South and the export market becomes more liberalized, South government weakens its optimal IPR policy to improve welfare. The opposite is true when trade is liberalized between the North and the South, or between the North and the export market. The effect of an increase in the size of the Southern market critically depends on whether the Northern firm chooses EPF over home production to increase its profit in the Southern market or in the export market. The robustness of our findings is explored in a variety of extensions including multiple export platforms, multilateral trade liberalization, and EPF by multiple Northern firms. Explicitly incorporating export markets and the possibility of EPF, this paper sheds new light on our understanding of the North–South conflict regarding IPR protection, a highly debated issue among member countries of the WTO.

Green Consumption and Relative Preferences in a Vertically Differentiated International Oligopoly

We consider an open to trade two-country model with two vertically differentiated goods and relative preferences in consumption. These preferences are such that consumers obtain satisfaction from their own consumption in relation to the consumption of the others. Product differentiation is along an environmental quality dimension and countries are asymmetric in average income. Analysing the equilibrium configuration, we find that, when relative preferences are relegated to the poorer country producing the brown good, the process of trade liberalization can favor the polluting firm, while penalizing the green rival. In these circumstances, trade liberalization can be environmentally detrimental. At the opposite, trade liberalization always favors the green producer when relative preferences are observed in both countries, with possibly positive effects on global emissions.

Mergers, Privatization and Environmental Considerations

ABSTRACTThe purpose of this paper is to analyze both merger sustainability and optimal privatization decisions, in an international mixed oligopoly model when it is explicitly assumed that firms’ production pollutes the environment. Contrary to traditional theory it is shown that both a merger between private firms and between one private and one public firm could be sustainable. Furthermore, the effects of environmental considerations on mixed firms’ optimal degree of privatization are analyzed.

International Tariffs in a Mixed Oligopoly with Research Spillovers

AbstractThis paper merges three strands of the literature – industrial organization, international trade, and economics of technical change – to examine the effect of tariffs on international mixed oligopolies which conduct research and development (R&amp;D) that is prone to spillovers. Mixed oligopolies are prevalent in the defense sector, among other sectors. Using a two-stage sequential game with R&amp;D in the first stage and production in the second stage, results show that higher tariffs reduce outputs of both the domestic public firm and foreign private firms, and private R&amp;D. Effects on domestic R&amp;D and welfare, and profits of foreign private firms depend upon spillovers. Within a large range of research spillovers, higher tariffs can in fact lower welfare. Some of these findings are different from traditional oligopolies and from models that ignore research spillovers. Policy implications are discussed.

How to counter union power? Equilibrium mergers in international oligopoly

We re-examine the common wisdom that cross-border mergers are the most effective merger strategy for firms facing powerful unions. In contrast, we obtain a domestic merger outcome whenever firms are sufficiently heterogeneous (in terms of productive efficiency and product differentiation). A domestic merger unfolds a “wage-unifying” effect which limits the union's ability to extract rents. When products become sufficiently homogeneous, then cross-border mergers are the unique equilibrium. However, they may be either between firms with the same cost efficiency or with different cost efficiencies. Social welfare is never higher under a domestic merger outcome than under a cross-border merger outcome.

Tax Principles and Tariff-Tax Reforms under International Oligopoly

In a two-country duopoly model, this paper compares destination- and origin-based commodity taxes adjusted to tariff reductions so that the world price and foreign welfare remain unaltered. We first find that this tariff-tax reform reduces domestic welfare under the destination principle while the opposite holds under the origin principle. Then, it is shown that this ranking is reversed if exports are taxed. In short, which is preferable between destination and origin taxes depends on the tax principle and which between imports and exports are taxed.

Strategic advertising policy in international oligopoly markets

Strategic trade policy has become an important tool used by countries to increase domestic welfare. Ma and Ulph (2012) further this discussion by analyzing strategic advertising policy in international oligopoly markets. They find that it is always optimal for a home government to subsidize advertising for exports, whether firms compete in a Cournot- or Bertrand-type game. By extending their analysis to include the Cournot-Bertrand model, we find that an advertising subsidy is not always optimal for the home country. In some cases, the optimal strategic policy is an advertising tax.

Volume and share quotas in Cournot competition

In this paper, we theoretically discuss volume and share quotas in the market where firms engage in Cournot competition. We show the equivalence among specific taxes, and volume quotas and share quotas with respect to equilibrium quantities. By using these results, we analyze comparative statics effects of volume and share quotas. Further, we apply the results to the examination of international oligopoly models with tariffs, import volume quotas, and import share quotas. Finally, we extend the model to endogenize the set of firms and derive a non-equivalence result of volume quotas and specific taxes.

International oligopoly, barriers to outsourcing and domestic employment

AbstractIn this paper we analyze the impact of barriers to outsourcing on domestic employment in an oligopolistic context. We show that although an outsourcing tax makes domestic labour cheaper, its employment effect is ambiguous due to strategic considerations. Analyzing international policy interdependence, we also show that, although a unilateral tax (subsidy) by a country must raise its domestic employment, this may be counterproductive in a Nash policy equilibrium. Finally, both a credit crisis and increased product differentiation tend to worsen the employment effects of an outsourcing tax. Our central findings are robust to both Bertrand and Cournot modes of competition.

Strategic Investment Subsidies under Asymmetric Oligopoly

AbstractThis paper examines strategic investment subsidies in an international oligopoly. A general oligopoly model is constructed in which firms compete in two stages and governments commit to investment subsidies prior to firms' actions. The paper considers asymmetry among firms that arises from the nature of goods they produce rather than their cost structures. When firms produce asymmetrically differentiated goods, it is found that a change in the number of foreign competitors may alter the sign of the optimal unilateral investment subsidy. An example of policy reversal is provided in the case of strategic research and development subsidies for a quality‐differentiated industry.

Port privatization in an international oligopoly

We investigate the effects of port privatization on port usage fees, firm profits, and welfare. Our model consists of an international duopoly with two ports and two markets. When the unit transport cost is high, port privatization reduces port usage fees, although neither government has an incentive to privatize its port. The equilibrium governmental decisions are inconsistent with the desirable outcome if the unit transport cost is not high enough. The government of the smaller country, in terms of market size, is more likely to privatize its port, and the government of the larger country is more likely to nationalize its port to protect its domestic market.