Essays on international trade in vertically related markets
Ryu, Han Eol
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This dissertation consists of five chapters: The first chapter contains a literature review, the next three contain three core essays and the final chapter provides some concluding remarks. The first essay studies the key factors that affect the optimal transfer pricing policy of a vertically integrated multinational corporation (MNC) in the presence of a downstream foreign competition. It examines two minimalist vertical models--one consisting of a vertically integrated firm monopolizing an intermediate input for its own and rival's downstream division, and the other comprising two vertically integrated firms competing in a final goods market. Four modes of competition are considered--Cournot, Bertrand, Stackelberg quantity and price. This essay shows that, in addition to the usual tax considerations, the optimal transfer pricing policy depends on competition mode, demand and strategic competition characteristics, vertical structure, and production technology. For example, under the same demand structure and competition mode, the two models can yield diametrically opposite outcomes; within a given vertical model, different competition modes may yield different optimal strategies; and within a given competition mode, the four pairings of ordinary substitutes/complements and strategic substitutes/complements can also produce quite different results. The second and third essays study the optimal privatization policy of an upstream public firm which competes with a foreign private rival. Both upstream firms supply an intermediate input to the domestic and foreign downstream firms competing in the home market (in the second essay) and in a third market (in the third essay). The two essays show that the upstream public firm's optimal profit margin and its privatization level depend on its market share, its initial public ownership level, and the numbers of firms in the two downstream groups; but the critical values that determine the optimal privatization policy are quite different between the two models. In addition, the case in which the upstream public firm is a monopoly is also examined. It is shown that full nationalization of the monopoly firm is always optimal. In both models, simulation analyses were performed to characterize the regimes of full or partial nationalization in terms of the numbers of firms in the two downstream groups, show the sensitivity of the public firm's optimal profit margin on the numbers of the home and foreign downstream firms, and illustrate the adjustment patterns of optimal levels of public ownership when the home or the foreign downstream firms continuously enter the market. Though each model yields different adjustment patterns, the reswitching pattern is found to be a possibility in both models.