Abstract
We consider a set of home firms, each of which has a stochastic requirement for a particular input. High-cost home firms can produce the input themselves. Low-cost foreign firms produce the input to sell it to home firms through an international market. Efficiency requires the input to be produced by foreign firms and traded in the market. Yet, home firms will always engage in inefficient home production. By producing some of its own input needs, a home firm cuts down on aggregate input demand, thus depressing prices in the market.
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Emons, W. Market power, uncertainty, and the level of trade. Open Econ Rev 5, 261–274 (1994). https://doi.org/10.1007/BF01000912
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DOI: https://doi.org/10.1007/BF01000912