Ignatius J. Horstmann

Endogenous market structures in international trade (natura facit saltum)

Abstract Almost all of the large literature on international trade with imperfect competition assumes exogenous market structures. The purpose of this paper is to develop a simple model that generates alternative market structures as Nash equilibria for different parameterizations of the basic model. Equilibrium market structure is a function of the underlying technology. Familiar configurations such as a duopoly competing in exports or a single multinational producing in both markets arise as special cases. Small tax-policy changes can produce large welfare effects as the equilibrium market structure shifts, implying discontinuous jumps in prices, quantities, and profits.

Strategic Investments and the Development of Multinationals

A model of multinational behavior is presented in which either the existence or absence of multinationals can be a Nash equilibrium outcome. The key determinant is the relationship between plant scale economies (a force for geographic centralization) and multiplant economies plus transport costs (leading to multinationality). The model predicts that multinational enterprise production arises when firm-specific and transportation costs are large relative to plant scale economies. The latter are both a technological and a strategic variable in the entry decision. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Patents as Information Transfer Mechanisms: To Patent or (Maybe) Not to Patent

A model of patenting behavior is presented in which an innovating firm possesses private information about profits available to competitors, and patent coverage may not exclude profitable imitation. A wide variety of predictions are obtained. Among them: a firm will patent only some fraction of its produced innovations, and this fraction is positively correlated with endogenous research and development expenditures. Numerous extensions of the model are developed, for example, the inclusion of an explicit patent race and the emergence of trade secrecy.

Up the average cost curve: Inefficient entry and the new protectionism

Abstract A two-country model is developed in which each country produces one good with increasing returns, the goods being perfect or imperfect substitutes. With Cournot-Nash behavior and free entry, certain restrictive trade policies have effects opposite to their favorable effect under noentry assumptions. Import tariffs and export subsidies lead to inefficient entry that raises rather than decreases the average production cost of and price charge by the domestic industry with negative welfare consequences. We argue that these predictions of our model are closely consistent with extensive Canadian data on entry, exit, and firms responses to trade liberalization.

Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise

A firm must decide whether to serve a foreign market by exporting, building a foreign branch plant , or licensing the production to an existing foreign producer. The ex istence of reputations implies that any licensing agreement must prov ide a licensee with the incentive to maintain the reputation. This cr eates a motive for the firm to internalize transactions by building a branch plant (i.e., by becoming a multinational). The model reflects a more general notion that the inability of the firm to control a li censees (agents) actions can provide incentives for multinational a ctivity. This paper explores the determinants of the firms mode of o peration as well as exploring the consequences of certain government policies.

EXPLORING NEW MARKETS: DIRECT INVESTMENT, CONTRACTUAL RELATIONS AND THE MULTINATIONAL ENTERPRISE*

We consider the multinational firms decision on whether to enter a new market immediately via direct investment or to contract initially with a local agent and (possibly) invest later. Use of a local agent allows the multinational to avoid costly mistakes by finding out if the market is large enough to support direct investment. However, the agent is able to extract information rents from the multinational due to being better informed about market characteristics. We find that direct investment is the desirable mode of entry when the market is on average large and there is little down- side risk in expected profits.

Firm-Specific Assets and the Gains from Direct Foreign Investment

It is widely held that multinational enterprises arise as a consequence of the existence of knowledge-based, firm-specific assets such as superior technology or management know-how. These assets are much like public goods within the firm in that they can be costlessly supplied to additional plants, thus leading to the efficiency of multiplant production. Foreign direct investment then consists of supplying the services of the assets to foreign operations and repatriated earnings are payments for these services. These notions are formalized in a simple model of the multinational enterprise and welfare implications are analyzed. Copyright 1989 by The London School of Economics and Political Science.

The game of negotiations: ordering issues and implementing agreements

Along with the rise in income inequality in the U.S., we have observed a simultaneous move toward fiscal devolution and increased government reliance on private provision of public goods. This paper argues that these phenomena are related. We describe a model of jurisdiction and policy formation in which the structure of government provision is endogenous and public good provision levels are determined by a political process that can exploit private motives for voluntary giving. The model predicts that an increase in income inequality leads to decentralization, with local jurisdictions becoming more income-homogeneous than the population as a whole. This reduction in local income heterogeneity, combined with a reduced tax base, results in increased reliance by government on private provision.

Is advertising a signal of product quality? Evidence from the compact disc player market, 1983–1992

Abstract We study panel data on advertising and pricing in the compact disc player market during 1983–1992. Controlling for product features, firm heterogeneity, and aggregate effects, (i) advertising increases after the player is introduced, but at a decreasing rate; and (ii) price falls from the outset, and at an accelerating pace. These patterns are inconsistent with both the perfect learning in papers by Kihlstrom and Riordan [J. Polit. Econ. 92 (1984) 427]; and Milgrom and Roberts [J. Polit. Econ. 94 (1986) 796] and the imperfect learning in Horstmann and MacDonald [J. Econ. Manag. Strat. 3 (1994) 561] versions of paper by Nelson [J. Polit. Econ. 82 (1974) 729] model of advertising. Extensions having persistent consumer uncertainty and learning can explain these profiles.

Bargaining Frictions, Bargaining Procedures and Implied Costs in Multiple‐Issue Bargaining

This paper explores how bargaining frictions and bargaining procedures interact to determine players bargaining costs in multiple-issue bargaining settings. When bargaining frictions take the form of discounting and agreements are implemented as they are reached, issue-by-issue negotiation can generate bargaining costs different from those that occur if all issues are bargained simultaneously. These cost differences result in differences in allocations across bargaining procedures such that players disagree on the desired method of bargaining. Similar results hold for certain fixed-cost bargaining friction specifications. This analysis provides a potential explanation of both agenda bargaining and incomplete contracts. Copyright 1997 by The London School of Economics and Political Science