Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry

Posted by D. Daniel Sokol

Horst Raff (Kiel Institute for the World Economy and Department of Economics, Christian-Albrechts-Universität zu Kiel), and Joachim Wagner (Institute of Economics, Leuphana University of Lüneburg, Germany) explore Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry.

ABSTRACT: This paper uses an oligopoly model with heterogeneous firms to examine how an industry adjusts to rising import competition. The model predicts that in the short run the least efficient firms in the industry become inactive, surviving firms face a fall in output, mark-ups and profits, and the average productivity of survivors increases. These pro-competitive effects of import penetration on the domestic industry disappear in the long run. The predictions for the short run are confirmed in an empirical study of the German clothing industry.