trade
4 Trade and Large Corporations: Kodak versus Fuji
International Trade
John McLaren
A company with global reach: A shop advertises “Kodak products” in the town of Safranbolu, Turkey.
4.1 Big Players in the Game of Trade 4.2 Background on Kodak, Fuji, and the War 4.3 Introducing Oligopoly 4.4 Autarky 4.5 Trade 4.6 Winners and Losers 4.7 Some Other Possibilities
Question: Is trade rigged in favor of large multinationals?
Common undercurrent of anti-globalization rhetoric.
But Kodak thinks they’re a victim of globalization.
Market for photographic film.
Two dominant players worldwide: Kodak and Fujifilm.
Kodak was the pioneer -- early 20th century.
Fujifilm was the upstart -- 1930’s.
Globalization in film.
Mid-century to 1970’s: Very little trade in film between US and Japan.
1970’s: Japanese import, FDI restrictions eased up.
Fujifilm opened a US subsidiary: Intense advertising, PR, sports promotion.
1985: Kodak opened a Japanese marketing subsidiary.
Salient facts.
Essentially a duopoly.
Long period of effective autarky in the film market.
Now, much trade both ways, but each firm’s share in its home market is much bigger than the other firm’s.
For most purposes, the two products are essentially the same.
So -- what’s the effect of trade on an oligopolistic industry?
We’ll examine by integrating an oligopoly model into trade.
Use ‘Cournot’ approach: Competition in quantities.
Simple, stylized model, but we’ll try to tailor it to fit Kodak and Fuji as much as possible.
The model.
One producer of film in Japan, one in the US.
No possibility of Entry.
Demand curve is the same in both countries:
Q = (1/2)(11 - P)108
Production technology is identical: MC = $4.00 per roll.
Under autarky, Kodak is a monopolist in the US; Fuji is a monopolist in Japan.
Inverse demand: P = 11 - 2x10-8Q
Implies marginal revenue: MR = 11 - 4x10-8Q
Set equal to MC and go.
Now, allow for trade.
Assume that either firm must pay $2.00 in transport/transaction costs/tariff to ship to the other country.
(If you don’t have that, they share each market equally -- unrealistic.)
Now, they’ll compete in each market.
Need to make a psychological assumption: What does Kodak expect Fujifilm to do?
We’ll assume that:
The two firms move simultaneously.
Each firm makes a guess about the other’s quantity sold in both markets.
Given that guess, the firm chooses its own quantity optimally, understanding how prices will adjust.
AND: both firms’ guesses are correct.
Cournot equilibrium.
Kodak sells qUSK in the US and qJK in Japan.
Fujifilm sells qUSF in the US and qJF in Japan.
Kodak makes a guess about the value of qUSF : hold that fixed for now.
Kodak’s demand in the US is then:
P = 11 - 2x10-8(QUS)
P = 11 - 2x10-8(qUSK + qUSF)
P = [11 - 2x10-8qUSF ] - 2x10-8qUSK
Kodak’s MR curve in the US is then:
MR = [11 - 2x10-8qUSF ] - 4x10-8qUSK
Fix a value of qUSF.
Get the MR that implies for Kodak.
Set MR = MC = $4 per roll.
This gives qUSK as a function of qUSF: Kodak’s reaction function.
MR = [11 - 2x10-8qUSF ] - 4x10-8qUSK = $4.00
Implies qUSK = 1.75x108 - (1/2)qUSF.
Do same thing for Fujifilm:
Fix qUSK; get Fujifilm’s MR in the US.
Set equal to Fujifilm’s MC in the US:
$4.00 + $2.00 = $6.00.
This gives qUSF as a function of qUSK:
qUSF = 1.25x108 - (1/2)qUSK.
Now, put these two pieces together.
Cournot equilibrium is a pair of quantity choices on both reaction functions simultaneously.
Intersection of the two lines.
Compare trade equilibrium with autarky.
Trade lowers Kodak’s sales in the US, but now allows Fuji sales in the US.
Overall effect on quantity of film sold in the US?
Quantity goes up (and therefore price goes down).
Reason: We’re moving along Kodak’s reaction function, whose slope is greater than 1.
So 1/4 of world output of film is traded in equilibrium.
Question: Would there be trade if we didn’t have imperfect competition?
No: PUS and PJ would both be equal to the common marginal cost of $4.00.
No motive to incur the transport cost to export.
Thus oligopoly itself is the reason for trade.
Now, the welfare effects of trade.
Consumers of film clearly benefit from trade.
Effect on Kodak profit: Some new sales; lower profit margin on existing sales.
But Kodak’s profits unambiguously fall.
Could have sold 200 million rolls at $7.00 under autarky, but chose not to, because 175 million at $7.50 was more profitable.
It’s even less profitable with the extra transport cost.
In this case, Kodak’s loss is greater than consumers’ gain, so US social welfare falls as a result of trade.
I.e., D > B+C.
Welfare effects of trade have two elements.
I. Society gains from increased competition.
Price is pushed closer to MC.
Deadweight loss from monopoly is attenuated.
Welfare effects of trade have two elements.
II. Society loses from redundant transport costs.
Costly two-way shipments of identical film are per se wasteful.
Example of rent-seeking: Each firm is using some real resources for the purpose of grabbing some of the other firm’s oligopolistic rent.
Net effect on welfare could go either way.
How about the big question: Do the large corporations capture most of the gains from globalization?
No --- in this case, everyone gains from globalization except the large corporations.
This is the competition effect.
Note the difference with monopolistic competition.
Some variations on the basic model.
I. No transport costs.
II. Asymmetric oligopoly.
III. Product differentiation.
IV. Competition in prices.
I. The case without transport costs.
Assume same model, except that transport costs = 0.
Then both firms have the same reaction function in both markets.
Market shares = 50%.
Effect of trade on welfare in each country?
I. The case without transport costs.
Effect of trade on welfare in each country?
POSITIVE. Area D disappears. Only competition effect remains.
Conclude that if transport costs are low enough, both countries gain from trade.
II. Asymmetric oligopoly.
Actual experience in the film industry suggests Fujifilm might have an advantage over Kodak in some ways.
Suppose, for concreteness, that the model is as before;
Fujifilm’s transport cost for selling in the US still = $2.00;
but Kodak’s transport cost for serving Japanese consumers is prohibitively high.
II. Asymmetric oligopoly.
Now, equilibrium in Japan is the same as under autarky;
Equilibrium in the US is the same as in the main model with trade.
Fujifilm gets its autarky profit plus some foreign profits;
Kodak gets its free-trade profits minus the foreign profits.
II. Asymmetric oligopoly.
Result: Japan gains from trade; the US does not.
The reason is that trade facilitates the transfer of profits from Kodak to Fujifilm.
III. Product Differentiation.
If Kodak film and Fuji film were two different products, it would be more likely that:
(i) The two corporations would benefit from trade.
(ii) The two societies would benefit from trade.
III. Product Differentiation.
Two big reasons:
(i) The competition effect would be weaker.
(ii) Consumers would now benefit from a rise in product diversity due to trade.
IV. Price competition.
Suppose that the two firms compete in prices.
I.e., Kodak tries to guess what price Fujifilm will charge in both markets;
chooses its optimal price accordingly, understanding how quantities will adjust;
and each firm’s guess is correct.
This is called Bertrand competition.
IV. Price competition.
In this model, that yields a price of $6.00 in both markets (to within a penny).
Proof. Suppose that in equilibrium, PKUS > $6.01.
Then, Fujifilm can grab the whole US market profitably by charging PKUS minus $0.01.
Thus, PFUS = PKUS - $0.01.
But then Kodak will optimally set its price $0.01 below PFUS. Contradiction.
IV. Price competition.
Outcome: PUS = PJ = $6.00.
No trade: Outside firm is just barely priced out of the market.
Once again, consumers benefit from competition effect, and oligopolists lose.
In this case, the net effect is guaranteed to be positive.
Main lessons.
Oligopoly is a reason for trade in and of itself.
To the extent that trade promotes competition between oligopolists, it hurts the oligopolists and benefits everyone else.
The benefit to everyone else can be greater or less than the harm to the oligopolists, depending on transport costs, asymmetries, product differentiation, and mode of competition.
Where we are.