An endogenization of market structure in international trade
Abstract
The market structure and firms' conduct in an industry are inevitably related to economic conditions. This dissertation presents an attempt to endogenize market structure to some extent to analyze the effects of changes in the economic condition on the conduct of the firms in the industry. The first essay analyzes the effect of exogenous exchange rate uncertainty on the equilibrium distribution of productive capacity across countries in an imperfectly competitive market with sticky factor prices. A model is constructed in which there are two countries and a single homogeneous good. N firms play a two-stage game. At the first stage each firm simultaneously chooses its cross-country distribution of capacity, and in the second stage each firm determines its level of production as a price taker. The exchange rate is revealed to firms between the first and second stages. It is shown that (1) an exogenous increase in exchange rate risk can lead to a boom in capacity construction across countries, with wide fluctuations in second-stage capacity utilization rates, (2) the degree of pass-through of exchange rate changes to prices is affected by the riskiness of the distribution of the exchange rate, and pass-through is generally less than full, (3) the larger the number of firms, the lower the level of exchange rate risk needed to trigger full cross-country diversification of capacity and (4) an increase in exchange rate risk has an ambiguous effect on the equilibrium number of firms when entry occurs at some fixed (sunk) cost. The second essay analyzes duopolistic price leadership games in which firms have capacity constraints and different unit costs. Under general assumptions on demand, the equilibrium of endogenous price leadership exists for arbitrary combinations of capacities and costs. The basic model is applied to examine the effects of tariffs and quotas with an assumption that the unit cost is identical before an intervention. It is shown that (1) a quota can affect profits of firms in various ways except the case of both worse off, (2) a tariff always makes the domestic firm weakly better off but the foreign firm weakly worse off, (3) it is more likely for a quota to induce the domestic firm to be a leader, while a tariff affects leadership in the opposite way, and (4) a case exists where the equivalence of tariffs and quotas holds.
Degree
Ph.D.
Advisors
Novshek, Purdue University.
Subject Area
Economics
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