Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry

17 Pages Posted: 2 Aug 2010

See all articles by Horst Raff

Horst Raff

Christian-Albrechts-Universitaet zu Kiel; CESifo (Center for Economic Studies and Ifo Institute); Kiel Institute for the World Economy

Joachim Wagner

University of Lueneburg - Institute of Economics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics; IZA Institute of Labor Economics

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Abstract

This paper uses an oligopoly model with heterogeneous firms to examine how an industry adjusts to rising import competition. The model predicts that in the short run the least efficient firms in the industry become inactive, surviving firms face a fall in output, mark-ups and profits, and average industry productivity increases due to a selection effect. These pro-competitive effects of import penetration on the domestic industry disappear in the long run. The predictions for the short run are confirmed in an empirical study of the German clothing industry.

Suggested Citation

Raff, Horst and Wagner, Joachim, Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry. World Economy, Vol. 33, No. 8, pp. 1006-1022, August 2010, Available at SSRN: https://ssrn.com/abstract=1650869 or http://dx.doi.org/10.1111/j.1467-9701.2010.01310.x

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