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IBIMA Publishing Journal of Research in Industrial Organizationhttp://www.ibimapublishing.com/journals/JRIO/jrio.htmlVol. 2 !2 "2 !2#$ %rticle I& 2'())*$ ( pages&OI: ! .+!(!/2 !2.2'())*
Copyright 2012 Horatio M. Morgan. This is an open access article distributed under the Creative CommonsAttribution License unported .0! "hich permits unrestricted use! distribution! and reproduction in anymedium! provided that original "or# is properly cited. Contact author$ Horatio M. Morgan %&mail$horatio.morgan'ryerson.ca
An Industrial Organization Approach to theStudy of Export Intensity: Strategic Market
Interactions and Export IntensityHoratio M. Morgan
Global Management Studies Department Ted Rogers School of Management Ryerson University, Canada_________________________________________________________________________________________________________________
Abstract
(n developing countries characteri)ed by relatively small domestic mar#ets! local *irms may have tointernationali)e in order to reali)e their gro"th potential. +espite the *ormidable challenges thatmay accompany the internationali)ation process! globally&oriented managers and domesticpolicyma#ers may e**ectively cra*t coherent e,port&promotion strategies and policies! respectively!i* they have a solid understanding o* the determinants o* e,port per*ormance. -hile the empiricale,port per*ormance literature in the *ield o* international business (/ has the potential tocontribute to"ards this end! it appears to be hampered by a paucity o* rigorous theoretical*rame"or#s. (n the virtual absence o* a "ell&articulated direction on ho" to *ill this theoretical void!this paper ma#es a case *or the application o* industrial organi)ation ( &based modeling in thisline o* research. (t *ormulates a model o* e,porting in the conte,t o* mar#et structurescharacteri)ed by a monopoly! and a symmetric linear tac#leberg duopoly "ith pricediscrimination. 3nder this theoretical *rame"or#! it is *ound that the tac#leberg leader has ane,port intensity o* )ero! "hile the tac#leberg *ollo"er has an e,port intensity o* one&hal*. /ut at ane,port intensity o* t"o&thirds! the price&discriminating monopolist has the largest e,port intensity.These analytical results provide insights into the so&called 4industry e**ects5 phenomenon that hasbeen noted in empirical e,port per*ormance studies! and strengthens the theoretical argument *orthe conventional use o* industry&dummy variables to control *or hypothesi)ed industry e**ects.More generally! this paper signals a potentially *ruit*ul direction *or ( &based modeling in thee,tant empirical e,port per*ormance literature.
Key ords: %,port (ntensity6 (ndustrial rgani)ation6 (nternationali)ation6 7rice +iscrimination.88888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888
Introduction
(n an increasingly competitive globaleconomy! the internationali)ation o* *irms isa potentially di**icult underta#ing that isli#ely to preoccupy globally&orientedmanagers and domestic policyma#ers ali#e.This is particularly so *or developingeconomies "here e,port&orientation may beimperative due to relatively small domesticmar#ets! among other *actors! that constrainthe gro"th opportunities o* local *irms Luo
and Tung! 2009 . (n this conte,t! the cra*tingo* e,port&promotion strategies and policies is
a critical tas#. Ho"ever! "ithout a solidunderstanding o* the determinants o* e,portper*ormance! managers and domesticpolicyma#ers may not be in a position tocon*idently! and e**ectively develop e,port&promotion strategies and policies!respectively.
tarting "ith the seminal "or# o* :ohansonand ;ahlne 1
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(/ scholars on e,porting at the *irm&level! has
the potential to contribute to the design o*e,port&promotion strategies and policies.Among the various research endeavors in the(/ *ield! much intellectual energy has beendevoted to the *irm&level e,port per*ormanceresearch agenda. This research agenda is anempirically&oriented one! "ith a notablelong&standing *ocus on the relationshipbet"een *irm&si)e and e,port intensity! asmeasured by the ratio o* *oreign sales to totalsales.
The conventional "isdom is that there is a
positive relationship bet"een *irm&si)e ande,port intensity. -hile some empiricalstudies appear to provide evidence insupport o* this e,pected positive relationship
Ma>occhi et al! 200?6 Moini! 1
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in output. 1 Alternatively! the constant
marginal cost assumption means that the*irm employs a constant return to scale technology. The *irm sells uantities and
to a local and a *oreign mar#et!respectively. The unit prices o* the product inthe local and *oreign mar#et are given by thelinear inverse demand curves! =
! and = ! respectively. (naddition! it is assumed that the *oreignmar#et is per*ectly competitive! and themonopolist *aces the entire do"n"ardsloping demand curve in the local mar#et. (tis *urther assumed that the *irm can
e**ectively prevent the resale o* the productamong customers in the local and *oreignmar#et6 alternatively! there e,ists transactioncosts e.g.! shipping and communicationcosts that ma#e it unpro*itable *or individualcustomers to engage in the secondary tradingo* the product bet"een the local and *oreignmar#et.
The pro*it *unction o* the monopolist is givenby$
= + 1-here = + is the total uantity soldin both the local and *oreign mar#et. Let
+ denote thee uilibrium e,port intensity o* thediscriminating monopolist at the optimal
uantities and .The analytical results under a monopoly "ithprice discrimination are summari)ed in the*ollo"ing proposition$
!roposition $ (* price discrimination is
permitted under a monopoly "ith t"ogroups o* consumers! local , and *oreign- 6 then *or > >,the e uilibrium pairs
1 The use o* a linear cost *unction rather than a uadraticone is a matter o* convenience! and is largelyinconse uential in the conte,t o* this study. Ho"ever! inother conte,ts! such as the study o* the 4mergerparado,5 in hori)ontal mergers alant! "it)er and=eynolds! 1
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both *irms employ the same constant returns
to scale technology6 there*ore! di**erences in*irm&si)e! or technological capabilities are notpotential determinants o* e,port intensityunder this theoretical *rame"or#.
imilar to the setup under the monopolymodel "ith price discrimination in theprevious section! ( assume that there are t"ogroups o* consumers! local , and *oreign- ! "ho populate a local and a *oreign
mar#et! respectively. As be*ore! individualconsumers across these mar#ets areassumed to *ace transaction costs that ma#e
it unpro*itable *or them to resell the productacross mar#ets a*ter initial purchases6 thus!price discrimination is also permissible inthis setting. -hen ordered by theirreservation prices! it is *urther assumed thatthe local mar#et comprises a bin o*consumers 4high&valued consumers5 "ith auni*ormly higher range o* valuations *or theproduct relative to the bin o* consumers inthe *oreign mar#et 4lo"&valuedconsumers5 .
(t is assumed that the linear inverse
demand curves *or the local and *oreignmar#ets are respectively$
" = ! + 2 2" = ! + 2 + ! + 2 -here " and " are the unit prices o* theproduct in the local and *oreign mar#et!respectively6 and # and # denote the
uantities sold by *irm $ % ! , 2 in the localand *oreign mar#et! respectively. Finally! it isassumed that each consumer "ithin each
group buys at most one unit o* the product.
The results under a tac#leberg duopoly "ithprice discrimination are summari)ed in the*ollo"ing proposition$
!roposition % (* price discrimination ispermitted in a symmetric linear
tac#leberg duopoly "ith t"o groups o*consumers! local , and *oreign - 6 then *or
> >,the pairs o* e uilibrium uantities!
prices and e,port intensities *or the
tac#leberg leader 4*irm 15 and thetac#leberg *ollo"er 4*irm 25 arerespectively$
&! , & 2 = 2 , &! , & 2 = , &, & = * + , + &! , & 2 = ,! 2
The proo* o* proposition 2 is provided in the
appendi,.
"iscussion
(n @utluBs 200< version o* tac#lebergduopoly "ith price discrimination! "e havethe general case involving groups o*consumers ordered in bins according to theirreservation prices6 proposition 2 aboveconstitutes a special case "hen ' = 2.There*ore! the analytical results o* @utlu
200< also obtain in proposition 26 that is!the tac#leberg leader supplies the product
only to the local mar#et! "hile thetac#leberg *ollo"er supplies the product toboth mar#ets. According to proposition 2! the
tac#leberg leader supplies the monopoly&output to the local mar#et! "hile the
tac#leberg *ollo"er sells one&hal* o* its totaloutput to the *oreign mar#et. This impliesthat the tac#leberg leader targets the high&valued local consumers! "hile the
tac#leberg *ollo"er e ually serves both thehigh& and lo"&valued group o* consumers athome and abroad! respectively. At the sametime! "hen the sales decisions o* the
tac#leberg leader and *ollo"er are ta#entogether! price discrimination is e**ectivelyobtained6 that is! &> .& Finally! in comparing the analytical results o*e,porting under a monopoly and a
tac#leberg duopoly "ith pricediscrimination! an interesting in*erence canbe dra"n$ the characteri)ation o* thecompetitive structure has implications *orthe e,port orientation o* *irms in a given
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? :ournal o* =esearch in (ndustrial rgani)ation
mar#et or industry. (mportantly! the
analytical results under a tac#lebergduopoly "ith price discrimination areessentially induced by the interdependencyin the output choices o* the t"o *irmsengaged in a strategic game. 3nli#e the
tac#leberg leader and *ollo"er! thediscriminating monopolist is not engaged insuch a strategic game. (n the absence o*strategic considerations! the discriminatingmonopolist has a higher e,port intensity thanthe tac#leberg *ollo"er6 that is!
= 2 * > & 2 = ! 2 . (n practice! adiscriminating monopolist and a tac#leberg
*ollo"er may be any t"o *irms that operatein t"o di**erent industries. Thus! "hat maybe captured as an 4industry e**ect5 on e,portintensity in a cross§ional study o* these*irms! may very "ell re*lect *undamentaldi**erences in the strategic mar#etinteraction across industries.
&onclusion
This paper demonstrates a potentially *ruit*ulavenue through "hich the ( *ield mayaddress the theoretical void that appears to
limit the contribution o* the (/ empiricale,port per*ormance literature to"ards thedevelopment o* coherent e,port&promotionstrategies and policies. (t does so bypresenting an ( &based *rame"or# thatsheds light on the styli)ed 4industry e**ects5phenomenon! and o**ers a *ormal >usti*ication*or the common use o* industry&dummies inempirical e,port per*ormance studies. 3nderthis ( &based *rame"or#! it is sho"n that thestrategic interaction bet"een *irms!combined "ith cross&national di**erences inconsumersB "illing&to&pay! may lead to
di**erences in the optimal ratio o* *oreignsales to total sales across *irms. This #eyanalytical result is independent o* the scale o*operation i.e. *irm si)e . Finally! it suggeststhat the underlying competitive structure o* aparticular mar#et or industry should besub>ect to more detailed analysis than iscurrently the case in the e,tant e,portper*ormance literature. For this reason! the( *ield has a potentially signi*icantcontribution to ma#e in this line o* research.
Ackno ledge#ent
( "ould li#e to than# an anonymous re*eree*or providing constructive comments andcorrections! and harlene Morgan *or proo*&reading the earlier dra*ts o* this paper. Allremaining errors are mine.
'eferences
/onaccorsi! A. 1
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:ournal o* =esearch in (ndustrial rgani)ation G
International 0usiness 1tudies$ D ! D1&
occhi! A.! /acchiocchi! %. J Mayrho*er! 3.200? . Firm i)e! /usiness %,perience and
%,port (ntensity in mes$ A LongitudinalApproach to Comple, =elationships!International 0usiness Re6iew$ 1 G ! 91
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9 :ournal o* =esearch in (ndustrial rgani)ation
ubstituting 9 into ? *or - = ! andsolving *or
2
yields$ 2 = 678*9
!
*! + ! D
At ( =! )( no" solve the pro*it ma,imi)ationproblem o* *irm 1 sub>ect to *irm 2Bs optimaldecision rules in 9 and D . The pro*it*unction o* *irm 1 is given by$
! =0 ! + 2 1 ! +0 . !; . 2; / !; / 2< / !
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