Trade liberalization and aftermarket services for

Authors: Jota Ishikawa Hodaka Morita Hiroshi Mukunoki

Publish Date: 2015/10/19

Volume: 62, Issue: 4, Pages: 719-764

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Abstract

We analyze the provision of repair services aftermarket services that are required for a certain fraction of durable units after sales through an international duopoly model in which a domestic firm and a foreign firm compete in the domestic market Trade liberalization in goods if not accompanied by the liberalization of foreign direct investment FDI in services induces the domestic firm to establish service facilities for repairing the foreign firm’s products This weakens the firms’ competition in the product market and the resulting anticompetitive effect hurts consumers and reduces world welfare Despite the anticompetitive effect trade liberalization may also hurt the foreign firm because the repairs reduce the sales of the imported good in the product market Liberalization of service FDI helps resolve the problem because it induces the foreign firm to establish service facilities for its own productsWe wish to thank two anonymous referees for insightful comments and suggestions We thank Kenzo Abe Masahiro Ashiya Richard Baldwin Taiji Furusawa Hiroshi Kinokuni Kazuharu Kiyono Jim Markusen Kaz Miyagiwa Takao Ohkawa Mauricio Varela Mike Waldman and seminar participants at GRIPS Osaka University University of British Columbia the JEA Spring Meeting the Hitotsubashi COE Conference on International Trade and FDI 2010 and 2012 ATW 2013 the 11th IIOC and EARIE 2013 for their helpful comments and suggestions We also thank Akira Sasahara and ChengTao Tang for excellent research assistance Jota Ishikawa acknowledges financial support from the Japan Society for the Promotion of Science through the GrantinAid for Scientific Research S Grant Number 26220503 Hodaka Morita acknowledges financial support from the Australian Research Council and Hiroshi Mukunoki acknowledges financial support from the Japan Society for the Promotion of Science through the GrantinAid for Scientific Research A and C Grant Numbers 24243034 and 26380310 The usual disclaimer appliesWe have varPi FRRvarPi FNR= 1q 16 1b2 + 4q b4 x FRR2/ 4b2 20 and varPi FORvarPi FNR=4 1q c+tqm L a2b+bcqq 1q 1b m L q+1 c+t /4b22q24 1q 2 c+tqm L2/4b22q20 where the inequalities are due to a underlinea Hence varPi FRRvarPi FNRvarPi FOR is satisfiedWe have varPi DRRvarPi DNR=1qB 3x FRR/4b2 242qb2q where B 3=a2b41b2+b2+3+2bb4+42b2b3b2qq+21620b2+5b4+22b2b2qt+bq1q1641qb2b4m L4b2242qb2qm H+2 1620b2+5b4+2+b82b2b3bq+4b3q2c By using a underlinea and cm H we can confirm that B 32+b42qb284b2b2+b3qc2+b2b2qm H+242bb2t+b31qqm L2+b42qb22c42bb21qc+t+b31q qm L0 The inequality means that varPi DRRvarPi DNR holds Besides that x DORx DNR see Proposition 1 implies that varPi DORvarPi DNR holds Consequently we have varPi DORvarPi DNRvarPi DRRsquare We have partial varPi DRRvarPi DNR/partial t=21q B 4/4b2 242qb22q2 where B 4=2b 822+bb+2qb3b2qa+41620b2+5b4+2b22b2qt4b2222b2+b2qqm H+2b383qb2q1qm L+41+b2b2b2q+b51+qqc Since partial B 4/partial a0 holds B 4left B 4right a=underlinea=2+b4b22q84b2b2+b3qcm H+2 42bb2t+1qm H+1qqb3m L0 Hence partial varPi DRRvarPi DNR/partial t0 is satisfiedsquare Firm F’s gains from entry are given by Delta varPi F=varPi FORvarPi FNR if Delta varPi Fle K F and Delta varPi F=varPi FORvarPi FRR otherwise We have partial 2varPi FORvarPi FNR/partial apartial t=41q/q2bb+220 and partial 2varPi FORvarPi FRR/partial apartial t=41q8b23qb22b2+b24b22q20Besides that we have left partial varPi FORvarPi FNR/partial tright a=underlinea=left partial varPi FORvarPi FRR/partial tright a=underlinea=81qc+tqm L/q4b220 Hence we can derive the unique cutoff level of a widetildeaN=c2+2bq+21+qt2q+1q bqm L/2bq such that partial varPi FORvarPi FNR/partial t0 holds for awidetildeaN partial varPi FORvarPi FNR/partial t=0 holds for a=widetildeaN and partial varPi FORvarPi FNR/partial t0 holds for ain underlineawidetildeaN Similarly we can derive widetildeaE=24b22+b2q8b23qt+2b22b2+b2+b2q8b23qc2b16+8b12b22b3+3b4+b2q8b24qqm L/2b8b23qb2q such that partial varPi FORvarPi FRR/partial t0 holds for awidetildeaE partial varPi FORvarPi FRR/partial t=0 holds for a=widetildeaE and partial varPi FORvarPi FRRpartial t0 holds for ain underlineawidetildeaEWe can easily confirm that partial widetildeaN/partial c0 partial widetildeaE/partial c0 partial widetildeaN/partial t0 partial widetildeaE/partial t0 partial widetildeaN/partial m L0 and partial widetildeaE/partial m L0 Hence partial Delta varPi F/partial t0 resp partial Delta varPi F/partial t0 is more likely to hold as c and t become smaller resp large and m L becomes larger resp small

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