Trade Liberalization, Firm Performance and Labour Market Outcomes in the Developing World: What Can We Learn from Micro-LevelData?

(1995) that increased import competition may reduce firm size and scale efficiency.

Consider n domestic firms and n^h foreign firms competing a la Cournot in an industry producing
a homogeneous good. Domestic and foreign firms employ the same production technology, featuring
a fixed cost f and a constant marginal cost 1∕φ. Markets are segmented, as in Brander (1981). Let
τ _h and τ f denote the ad valorem tariffs charged by the domestic and foreign country, respectively.
The profits of domestic and foreign firms (π and π^h, respectively) are given by:

π  =(ph - 1∕φ)qh + (pf ∕(1 +τf) - 1∕φ)qf - f                  (13)

π*  = (ph∕(1 + τh) - 1∕φ)qh + (pf - 1∕φ)qf - f

Here, qh and q*_h denote, respectively, domestic and foreign firms’ sales to the domestic market,
whereas qf and qf are domestic and foreign firms’ sales to the foreign market, respectively. p_h and
pf are the final consumer prices in the domestic and foreign market, respectively.

Since the two markets are segmented (and marginal costs are constant), a firm’s choice of
output in one market is independent of its choice of output in the other market. Hence we can
concentrate on the domestic market to study the impact of τ_h on q_h and q_h^h , noting that the impact
of τf on qf is analogous to that of τh on q_h^h . The first order conditions for profit maximization in
the domestic market are given by:

Totally differentiating equations (14) with respect to qh, q_h^h and τh, using Cramer’s rule and
assuming that firms’ outputs are strategic substitutes, it is possible to show that:

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