Transcript Folie 1 - uni

Preferential Trade Agreements
and
Multi-Product Firms
Stefan Rouenhoff & Carsten Eckel
University of Bamberg
11th Annual Conference of the European Trade Study Group
Rome, September 10, 2009
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Literature (1)
Preferential trade agreements and FDI
•
Focus of literature on preferential trade agreements (PTAs) and
horizontal FDI of single-product firms (SPFs)
•
Literature finds the tariff jumping motive and thus the intention to
exploit the proximity to large regional markets as driving force for
horizontal FDI of SPFs
•
PTAs are an incentive for horizontal FDI of SPFs, since they create
large markets
•
E.g. Motta & Norman (1996), Puga & Venables (1997)
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Literature (2)
Multi-product firms
•
High importance of MPFs, Bernard, Redding & Schott (2006)
•
Increasing amount of literature on multi-product firms (MPFs), e.g.
Nocke and Yeaple (2006), Eckel & Neary (2009) and Eckel, Iacovone,
Javorcik & Neary (2009)
•
Cannibalization of own sales
•
The cannibalization effect induces a MPF to reduce competition among
its own product varieties by splitting up the production of varieties into
different countries – cannibalization reduction motive, Baldwin &
Ottaviano (2001)
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Research Objectives and Main Findings
Research objectives:
1. How does a preferential trade agreement between two countries alter
the market supply strategy of an MPF, located in a third country?
2. How does the MPF’s market supply strategy affect the welfare of the
two countries, concluding a preferential trade agreement? (excluded in
presentation)
Main findings:
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Research Objectives and Main Findings
Research objectives:
1. How does a preferential trade agreement between two countries alter
the market supply strategy of an MPF, located in a third country?
2. How does the MPF’s market supply strategy affect the welfare of the
two countries, concluding a preferential trade agreement? (excluded in
presentation)
Main findings:
•
Market supply strategy of a MPF is driven by both, the tariff jumping motive and
cannibalization reduction motive
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Research Objectives and Main Findings
Research objectives:
1. How does a preferential trade agreement between two countries alter
the market supply strategy of an MPF, located in a third country?
2. How does the MPF’s market supply strategy affect the welfare of the
two countries, concluding a preferential trade agreement? (excluded in
presentation)
Main findings:
•
Market supply strategy of a MPF is driven by both, the tariff jumping motive and
cannibalization reduction motive
•
Partly relocation of production and thus lower investment in integrated than in
non-integrated markets possible
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Research Objectives and Main Findings
Research objective:
1. How does a preferential trade agreement between two countries alter
the market supply strategy of an MPF, located in a third country?
2. How does the MPF’s market supply strategy affect the welfare of the
two countries, concluding a preferential trade agreement? (excluded in
presentation)
Main findings:
•
Market supply strategy of a MPF is driven by both, the tariff jumping motive and
cannibalization reduction motive
•
Partly relocation of production and thus lower investment in integrated than in
non-integrated markets possible
•
Lower welfare in integrated than in non-integrated markets possible, if partly
relocation of production takes place (excluded in presentation)
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Reference Case
Baldwin & Ottaviano (2001)
Market supply strategy of the MPF
Country B
Country A
t
Production plant
variety 1
Production plant
variety 2
t
•
A MPF produces two imperfectly substitutable product varieties
•
Splitting up production reduces the cannibalization of own product varieties
(reason: tariff barriers)
•
Horizontal FDI of the MPF causes two-way trade in varieties
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Extension I
• Assume, there exists a third country – Rest of the world (ROW)
Country B
Country A
t
Production plant
variety 1
Production plant
variety 2
t
ROW
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Extension II
•
Further assume, the MPF has two production plants for the two
product varieties in the ROW
Country B
Country A
t
Production plant
variety 1
Production plant
variety 2
t
ROW
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Extension III
•
Further assume, there two economic settings
Non-integrated markets
Country B
Country A
t
Production plant
variety 1
Integrated markets
Country B
Country A
Production plant
variety 2
Production plant
variety 2
t
ROW
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Production plant
variety 1
ROW
Preferential Trade Agreements and Multi-Product Firms
Main Mechanisms (1)
Integrated markets
Country B
Country A
Optimal market supply strategy of the
MPF in integrated markets?
Production plant
variety 2
Production plant
variety 1
ROW
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Main Mechanisms (1)
Integrated markets
Country B
Country A
Production plant
variety 2
Production plant
variety 1
Optimal market supply strategy of the
MPF in integrated markets?
• Argument against this market supply strategy:
CANNIBALIZATION REDUCTION MOTIVE
ROW
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Main Mechanisms (1)
Integrated markets
Country B
Country A
Production plant
variety 2
Production plant
variety 1
Optimal market supply strategy of the
MPF in integrated markets?
• Argument against this market supply strategy:
CANNIBALIZATION REDUCTION MOTIVE
(substitutability of product varieties)
ROW
• Argument for this market supply strategy:
TARIFF JUMPING MOTIVE
(tariff barriers)
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Main Mechanisms (2)
Answer: Not necessarily
Integrated markets
Country B
Country A
Production plant
variety 2
CANNIBALIZATION REDUCTION MOTIVE
+
TARIFF JUMPING MOTIVE
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
t
ROW
Production plant
variety 1
t
Preferential Trade Agreements and Multi-Product Firms
Theoretical Framework (1)
Partial equilibrium analysis
• One monopolistic MPF, located in the “Rest of the World” (ROW)
 wants to supply two identical countries (j=A,B)
 produces two product varieties (i=1,2), which are
substitutable, 0<b<1
• Each variety is produced in a separate production plant under
constant variable costs c
• Each production plant is associated with fixed costs F
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Theoretical Framework (2)
• Two economic settings
 No preferential trade agreement between any country
(non-integrated markets - NIM)
 A preferential trade agreement between country A & B
(integrated markets - IM)
• Identical unit tariff costs t between country A, B and ROW
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Theoretical Framework (2)
• Two economic settings
 No preferential trade agreement between any country
(non-integrated markets - NIM)
 A preferential trade agreement between country A & B
(integrated markets - IM)
• Identical unit tariff costs t between country A, B and ROW
Non-integrated markets
Country A
Country B
Integrated markets
Country A
Country B
t
t
t
ROW
t
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
t
ROW
t
Preferential Trade Agreements and Multi-Product Firms
Consumers in Non-Integrated and Integrated Markets

xi2 
U    xi    bx1 x2
2
i 1 
2
j
Utility function:

Inverse demand function:
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
j
j
j
Variety 1: p1  1  x1  bx2
j
j
j
Variety 2: p2  1  x2  bx1
Preferential Trade Agreements and Multi-Product Firms
Manufacturing
• There exist several strategies of the MPF how to supply the
markets A & B in non-integrated and integrated markets
• However we choose only those supply strategies which show a
lower investment in non-integrated than in integrated
markets
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in Non-Integrated Markets
Market supply strategy A4 – profit function
(referring to Baldwin & Ottaviano)
2
B
2
B


   pi xi  c xi  t x  x  2F
A4
j
i 1 j  A
Revenues
j
j
i 1 j  A
B
1
Variable costs
A
2
x2A
Fixed costs
Country B
Country A
Production plant
variety 1
t
Production plant
variety 2
t
F x2B
x F
A
1
x1B
ROW
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in Non-Integrated Markets
Market supply strategy A4 – profit function
(referring to Baldwin & Ottaviano)
2
B
2
B


   pi xi  c xi  t x  x  2F
A4
j
i 1 j  A
Revenues
j
j
i 1 j  A
B
1
Variable costs
A
2
x2A
Fixed costs
Profit maximization rationale
Country B
Country A
Production plant
variety 1
t
Production plant
variety 2
t
F x2B
x F
A
1
x1B
ROW
Above a critical threshold tariff
rate the MPF decides for market
supply strategy A4 in nonintegrated markets
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in Integrated Markets
Market supply strategy A6 – profit function
2
B
2
B


   pi xi  c xij  t x1A  x1B  F
A6
j
i 1 j  A
j
Country A
i 1 j  A
A
2
x
Revenues
Variable costs
Fixed costs
Country B
Production plant
variety 2
F
A
1
x
t
ROW
x2B
x1B
t
Production plant
variety 1
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Manufacturing in Integrated Markets
Market supply strategy A6 – profit function
2
B
2
B


   pi xi  c xij  t x1A  x1B  F
A6
j
i 1 j  A
j
Country A
i 1 j  A
A
2
x
Revenues
Variable costs
Fixed costs
Country B
Production plant
variety 2
F
A
1
x
x2B
x1B
Profit maximization rationale
Within a certain range of tariff
rates and product subsitutability the MPF decides for market
supply strategy A6 in integrated
markets
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
t
ROW
t
Production plant
variety 1
Preferential Trade Agreements and Multi-Product Firms
Comparative Static Analysis (1)
Investment in non-integrated and integrated markets
t
tH
C
Production plants in non-integrated markets
*
t IM
Production plants in integrated markets
(2,1)
A
t max
B
tL
bH
bL
*
t NIM
b
Parameters: c  0.005,F  0.05
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Comparative Static Analysis (2)
Investment in non-integrated and integrated markets
t
tH
C
*
t IM
Intermediate
tariffs
(2,1)
A
t max
B
tL
bL
Intermediate
substitutability of goods
bH
*
t NIM
b
Parameters: c  0.005,F  0.05
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Comparative Static Analysis (2)
Investment in non-integrated and integrated markets
t
tH
Tariff jumping motive and
Cannibalization reduction motive
influence investment decisions
C
*
t IM
Intermediate
tariffs
(2,1)
A
t max
B
tL
bL
Intermediate
substitutability of goods
bH
*
t NIM
b
Parameters: c  0.005,F  0.05
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Comparative Static Analysis (2)
Investment in non-integrated and integrated markets
t
tH
Tariff jumping motive and
Cannibalization reduction motive
influence investment decisions
C
*
t IM
Intermediate
tariffs
(2,1)
A
Relocation of
production
t max
B
tL
bL
Intermediate
substitutability of goods
bH
*
t NIM
b
Parameters: c  0.005,F  0.05
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Results and Outlook
 Relocation of production possible
 Both, “tariff jumping motive” and “cannibalization
reduction motive” are decisive for market supply
stragegy
 Extension II: varying country size
 Extension III: varying tariff costs
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms
Thank you for your attention!
Stefan Rouenhoff & Carsten Eckel, University of Bamberg
Preferential Trade Agreements and Multi-Product Firms