A Simple Model of Foreign Brand Penetration with Multi-Product Firms: Non-Monotone Responses to Trade Liberalization

Abstract

Nous étudions l'effet de la libéralisation du commerce international sur la prolifération des marques étrangères sur le marché du pays domestique. Les entrepreneurs du pays domestique font leur choix entre la production des produits locaux et la distribution des produits étrangers. Suite à la baisse des coûts d'importation, les importateurs élargissent l'éventail des variétés de produits importés. La croissance de la proportion des entrepreneurs qui se contentent d'importer entraine la croissance des marques étrangères sur le marché local, ce qui finalement réduit la taille de firmes importatrices.

The purpose of this study is to illustrate, using a simple model of monopolistic competition with multi-product firms, how trade liberalization affects the degree of foreign brand penetration. We model this in terms of the profit incentives for domestic entrepreneurs to choose to offer domestic brands or foreign (imported) brands, and to determine the range of varieties within each brand. As trade costs decrease, in the medium run the provider of each foreign brand will widen its range of varieties, while the provider of each domestic brand will narrow down its range of varieties. However, in the long run, more domestic entrepreneurs choose to become foreign brand providers and the range of each foreign brand becomes narrower, relative to the initial equilibrium.