Friday, April 26, 2019

FDI and International Collusion

By: Uday Bhanu Sinha (Department of Economics, Delhi School of Economics)
Abstract: We develop a supergame model of collusion between price-setting oligopolists when the trade between countries involves per-unit trade cost and FDI requires a fixed cost of setting up a subsidiary in a foreign country. We demonstrate that cross hauling of FDI may facilitate collusion based on territorial allocation of markets. Whenever FDI is not helpful for sustaining collusion, the collusive arrangement involves no FDI at all. With asymmetric number of home firms or with different sizes of the markets, FDI may facilitate international collusion at lower levels of trade costs and thus our analysis also throws some light on the empirical puzzle regarding the trade liberalisation and FDI flows observed since the 1990s.
Keywords: Foreign direct investment, collusion, multimarket contact, cross hauling of FDI, price competition, homogenous good.
JEL: D43 F12 F15 F21 F23 L13 L41
Date: 2018–12

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