The Effect of Subsidized Imports on Domestic Industries: A Comparison of Market Structures

Authors:
Morris E. Morkre
Working Paper:
180

Does the extent of injury suffered by a domestic industry from unfair imports depend on the type of competition that exists between domestic and foreign firms? Is injury more severe when domestic and foreign firms are perfect competitors or when they are oligopoly rivals? These questions have important implications for such issues as the administration of U.S. countervailing duty (CVD) law. This paper attempts to shed light on these issues by comparing the injury caused by subsidized imports under five different market structures, perfect competition and four types of oligopolies. One of our principal results is that, other things remaining the same, subsidized exports cause relatively more harm under perfect competition than under oligopoly. Harm is measured by the percent change in domestic industry revenue caused by a one percent increase in the subsidy granted to foreign firms. The factor that drives this result is the extent to which price of foreign product is affected by the subsidy, the "pass-through" issue. Under perfect competition (and with constant marginal costs) the full amount of the foreign subsidy is passed through to the price of the foreign product in the domestic market. However, under oligopoly there is a wedge between price and marginal cost (i.e., price exceeds marginal revenue) so that price of the foreign product in the domestic market does not fall by the full amount of the unit subsidy. As a consequence, the adverse effect of the subsidy on domestic industry is smaller under oligopoly. This result suggests that using the competitive market assumption to estimate injury yields upper bound estimates when the true market structure is oligopoly. Our second principal result is that we find that competitive industries are more sensitive to subsidies than oligopolies. In particular, a perfectly competitive industry is at least three times more sensitive to subsidies than even a Bertrand oligopoly. Moreover, as the degree of rivalry in oligopoly decreases, domestic industries are less sensitive to subsidies