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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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:ournal o* =esearch in (ndustrial rgani)ation 2
(/ 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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:ournal o* =esearch in (ndustrial rgani)ation
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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:ournal o* =esearch in (ndustrial rgani)ation
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< / !
