Social Efficiency of Entry in an Open Economy

Abstract

We show that cost asymmetry between the domestic and foreign firms is not necessary for the occurrence of insufficient entry in the domestic country. This result provides a rationale for pro-competitive domestic policies even in the absence of cost asymmetries among the domestic and foreign firms. However, if significant demand comes from foreign countries, and the market structures are determined endogenously in the domestic and foreign countries, domestic-entry in an open economy might not be insufficient, implying that foreign competition might not reduce the importance of anti-competitive domestic policies.

Partisan competition authorities, Cournot‐oligopoly, and endogenous market structure

“…He, inter alia, shows that the government can object to FDI, despite a rise in welfare, since its payoff may decline if it attaches different weights to the payoffs of firms and consumers. Marjit and Mukherjee (2013, 2015) and Han et al (2022) assume that the government evaluates entry by considering the effects on domestic profits and consumer surplus. While they do not explicitly study different weights in the government's objective, they effectively utilize the third argument put forward above.…”

“…Chang et al (2010) consider a setting in which a positive fraction of the good is consumed outside the jurisdiction, which is relevant for the definition of welfare. Accordingly, consumer surplus accruing in other jurisdictions reduces the optimal number of firms while not affecting entry in market equilibrium (see also Han et al, 2022). Analytically, the set‐up by Chang et al (2010) is comparable to a framework with domestic consumers only, whose weight in the welfare objective is less than that of firms.…”