Firm strategies in international markets: The case of international entry into the United States wine industry

Juan B Solana Rosillo, Purdue University

Abstract

This dissertation develops a cost benefit framework that explains firms' international entry decisions, accounting for consumer demand for differentiated products, competitors' strategies and distributors' market power. It is used to explain the economics of observed entry patterns of Spanish and Australian firms into the US wine import industry. In addition to simulating observed industry behavior, we also calculate effects of alternative firm entry strategies and the impact on Spanish exporters of current export subsidy policies. We found that (1) international distribution costs represent a large fraction of the final product price, therefore their inclusion in international trade models is critical to determining industry outcomes, and (2) market power along the international distribution channel substantially affects exporters' derived demand. Accurate analysis of firm profits from international entry needs to account for potential revenue increases, and from bypassing distributors with market power, in addition to cost effects. Therefore, an entry mode with higher fixed cost (opening a marketing subsidiary) can result in higher net profit than other modes with lower fixed costs (e.g., exporting directly). Due to the imperfectly competitive nature of the wine market, together with market power in distribution, we found that Australian firms, entering by a marketing subsidiary instead of exporting directly, rapidly increased their market share. For the case of wine imports to the US, country of origin does not determine firm-level performance. Entry mode and marketing strategy in the target market better explain market outcomes. Australia shows numerous dynamic new entrants that, together with appropriate marketing strategies, explain Australian market share gain in the US market. Also, dynamic Spanish entrants succeed in the US market, while Spanish incumbent firms stagnated. Spanish firms should either open a marketing subsidiary in the US, to better control pricing and avoid distribution mark-ups, or exercise exporter market power by means of a marketing board. We found that the effects of existing export subsidies on final prices and derived demand are very small. In a distribution system where wholesalers exercise market power, benefits of Spanish government export subsidies are largely captured by wholesalers, rather than Spanish firms or US consumers.

Degree

Ph.D.

Advisors

Abbott, Purdue University.

Subject Area

Agricultural economics|Business costs|Marketing

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