Shabtai Donnenfeld

Oligopolistic competition and international trade : Quantity and quality restrictions

Abstract We examine trade restrictions such as quantity and quality limitations on imports in an oligopolistic industry consisting of foreign and domestic firms. We find that the effects of trade policy hinge on the location of the quality produced by the firms in the quality spectrum. A quota leads to positive protection while minimum quality standards leads to negative protection. Furthermore, minimum standards lower national welfare and a quota has an ambiguous effect on welfare.

Limit Qualities and Entry Deterrence

In this article, we investigate how the interplay of competition among incumbents and the magnitude of a potential entrants setup cost determines the configuration of the array of products to be offered in a perfect Nash equilibrium. We show that incumbents can use limit qualities to deter entry. We also demonstrate that rivalry among incumbents may lead to excessive entry deterrence. Our analysis generates predictions about the correlation between the degree of product differentiation and the size of the entrants setup costs.

Vertical product differentiation with entry

Abstract This paper examines the non-cooperative behaviour of established firms that compete in product quality and prices while foreseeing the effects of their rivalry on the decisions made by the later entrants. We prove an existence and uniqueness of the equilibrium and show that the dominant firms engage in maximal product differentiation, i.e., select the highest and lowest technologically feasible qualities. Later entrant, however, always selects an intermediate quality. Moreover, we show that the equilibrium configuration is identical to that generated by perfect foresight equilibrium in a model of sequential entry. Furthermore, the profits earned by each firm are ranked in the same order as the qualities, implifying that the later entrant, despite being the last mover, ends up with higher profits and larger market share than one of the incumbents.

Currency Invoicing in International Trade: An Empirical Investigation

The authors investigate the choice of currency of invoicing in international trade under exchange rate fluctuations. Predictions derived from a model developed by Donnenfeld and Zilcha in 1991, and others, regarding the optimal choice of currency of invoice are tested for imports into Canada. The authors employ a unique dataset from Customs Canada that covers a six-year period and lists all currencies used for invoicing by industry. The empirical results support the hypothesis that there is a positive relationship between the extent of invoicing in the importers national currency and exchange rate risk, and a negative relationship between invoicing in the exporters currency as well as invoicing in a third currency and exchange rate risk. The empirical results further indicate that relative size of a country plays a role in determining the currency of invoicing.

Regional Blocs and Foreign Direct Investment

The paper examines the impact of the emergence of regional blocs on the patterns of interbloc and intrabloc trade when firms have the option to engage in foreign direct investment (FDI). For exogenously given external tariffs, when firms have the option to engage in FDI, all interbloc trade may cease-complete trade diversion that is replaced by interbloc FDI investment creation. In such an event the volume of world trade declines but this is more than offset by the increase in world output due to direct investment. The paper also investigates the optimal tariff that a trading bloc levies on imports from nonmember countries. The tariffs are restricted by the option to engage in two-way direct investment; hence, the regional blocs are hampered from mutually harming one another through an escalation in the tariff war. Finally, the formation of two regional blocs enhances the welfare of all countries. Copyright Blackwell Publishing Ltd 2003.

Import controls under imperfect information

Abstract This paper examines the effects of governmentally imposed quality controls upon an industry which consists of a domestic monopolist which is facing competition from a large number of foreign firms. Domestic consumers know the quality of the home good, while their information about the quality of imports is imperfect. Although minimum quality standards are directly imposed on imports, they indirectly affect the behavior of the domestic monopolist. The domestic firm raises quality but its price response is ambiguous. Furthermore, its market share and profitability decline. Import controls harm some consumers and benefit others. We state conditions which lead to a lower national welfare.

Monopoly regulation, quality choice and welfare: The open economy case

Abstract We extend the analysis of regulation to the case where a domestic monopolist produces goods of variable quality and is facing competition from foreign firms. In contrast with the closed economy case, we show that because of import competition, looser price regulation becomes more desirable.