THREE ESSAYS ON INDUSTRIAL ORGANIZATION AND INTERNATIONAL ECONOMICS

Abstract

There are three main chapters in the dissertation which fall in the areas of industrial organization and international economics. After the introduction and the literature review, I present two different models that highlight how the degree of substitutability between differentiated products on a market affects a new entrant's entry decisions. I further extend the benchmark model to discuss the implications of the government trade policy on the competition strategies. The last chapter investigates how the bilateral trade flows in various industries between the United States and China respond to Yuan/Dollar exchange rate fluctuations and a few other key variables. In the second chapter, I extend the Singh and Vivies (1984) model and the Hackner (2000) model by allowing for a multi-product duopoly, a domestic incumbent and a foreign entrant, with asymmetric costs in producing two differentiated products: high- and low-quality. If they engage in Cournot competition, in the subgame perfect Nash equilibrium, the foreign entrant will choose to supply both products when two varieties are more heterogeneous. If two varieties are more homogeneous, the foreign entrant tends to supply only one product. After extending the model to consider the tariff imposed on foreign imports, the simulation results suggest that, to increase domestic welfare, the government should allow cost-effective foreign entrants to enter, but keep cost-ineffective ones out of the domestic market. In the third chapter, I provide a thorough analysis of the Bertrand model with a setup that is similar to the Cournot model. When firms compete on prices, the SPNE differs significantly from that of the Cournot model. Depending on the relative marginal cost between two firms, there are circumstances under which the foreign entrant would choose to only enter into the low- or the high-quality market regardless of the degree of substitutability between two varieties. Furthermore, when the domestic government imposes a tariff on the foreign imports, the foreign entrant's entry decision changes with the tariff level. In the last chapter, unlike the existing literature which mainly look at the relationship between the exchange rate and the trade balance at the aggregate level, I attempt to investigate the short-run and the long-run impact of the Yuan/Dollar exchange rate on the US trade balance at the commodity level using a new methodology, the Autoregressive Distributed Lag Bounds Testing approach. As most articles found no short-run and long-run relationship between the exchange rate and the trade balance at the aggregate level ("aggregation bias"), I argue that different commodities may respond to the exchange rate fluctuations differently. Therefore, this study would offer us a better understanding on which US industries are more vulnerable to the Yuan/Dollar exchange rate fluctuations and which ones are strong players against Chinese competitors. In addition, I further explore other possible contributors to the US trade deficit such as income levels, China FDI inflow, and the US FDI outflow.