Economic Theory

, Volume 62, Issue 4, pp 719–764 | Cite as

Trade liberalization and aftermarket services for imports

Research Article

Abstract

We analyze the provision of repair services (aftermarket services that are required for a certain fraction of durable units after sales) through an international duopoly model in which a domestic firm and a foreign firm compete in the domestic market. Trade liberalization in goods, if not accompanied by the liberalization of foreign direct investment (FDI) in services, induces the domestic firm to establish service facilities for repairing the foreign firm’s products. This weakens the firms’ competition in the product market, and the resulting anti-competitive effect hurts consumers and reduces world welfare. Despite the anti-competitive effect, trade liberalization may also hurt the foreign firm because the repairs reduce the sales of the imported good in the product market. Liberalization of service FDI helps resolve the problem because it induces the foreign firm to establish service facilities for its own products.

Keywords

Aftermarket services Trade liberalization Foreign direct investment International oligopoly 

JEL Classification

F12 F13 F23 D43 L13 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  • Jota Ishikawa
    • 1
    • 2
  • Hodaka Morita
    • 3
  • Hiroshi Mukunoki
    • 4
  1. 1.Faculty of EconomicsHitotsubashi UniversityKunitachiJapan
  2. 2.RIETIChiyodaJapan
  3. 3.School of Economics, UNSW Business SchoolThe University of New South WalesSydneyAustralia
  4. 4.Faculty of EconomicsGakushuin UniversityToshimaJapan

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