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Heiko Karle, ECARES Print
Friday, 02 April 2010, 12:15 - 13:15

The Strategic Disadvantage of Being an Exporter

Heiko Karle, ECARES, ULB

Abstract: This paper sheds light on the strategic effects of output shifting between geographically-separated product markets as a short-term adjustment to asymmetric demand shocks. The model features two types of firms, exporters and non-exporters, which decide on their production level before the realization of the demand shocks. Since they have distribution channels in several markets, exporters decide after the realization of the demand shocks how much to sell in each market, while domestic firms are committed to sell their output in the home market. In a setup with quantity competition, we show that exporters benefit from a higher flexibility than domestic firms, but face a strategic disadvantage as they cannot commit at the production stage to the amount that they will sell in a given market.  Although all firms produce simultaneously, exporters are Stackelberg followers and the equilibrium is (in expectation) that of a Stackelberg game. We draw the consequences of this framework at the firm level and show that the home sales of a firm entering the export market should decrease, while affecting its competitors in a non-trivial manner. At the aggregate level, we find that output in a country first increases and then decreases in the proportion of exporters. We derive the implications for welfare and trade policy.

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