Vivek Ghosal

"Potential foreign competition in U.S. manufacturing," International Journal of Industrial Organization Volume 20, Issue 10, December 2002, pages 1461-89.

JEL codes: L40, L10, F01
Keywords: import competition, competition policy, market structure

Abstract: Trade barriers are falling and U.S. producers are competing in increasingly open international markets. Further, data reveal considerable heterogeneity across industries in the intertemporal path of import-penetration. Against this backdrop, we focus on an issue that is increasingly important for competition policy analysis: "potential" foreign competition. Inadequate attention to potential foreign competition could result in a biased picture of total competition, leading to misguided antitrust decisions. Drawing on the conceptual framework outlined by Landes and Posner (Harvard Law Review, 1981), we measure potential foreign competition by the intertemporal response of industry import-share to industry-specific and aggregate economic factors. Our estimates indicate wide variation across industries in the degree of potential foreign competition. A particularly striking finding is that highly concentrated industries, which are more likely to be subject to antitrust scrutiny, have a significantly greater degree of potential foreign competition than low concentration industries, even though the extent of actual foreign competition is similar across these groups of industries. These findings provide a strong basis for competition policy analysis to lay added emphasis on evaluating potential foreign competition in these increasingly open international markets.