The adverse effect of competition on consumers under foreign competition

We examine undesirable competition in an asymmetric Cournot oligopoly under foreign competition and indirect taxation. We find that entry of inefficient domestic firms benefits consumers, while that of efficient foreign firms may hurt consumers when the number of foreign firms is relatively small. This result is different from that obtained in Dinda and Mukherjee (2014) which ignore foreign competition. We thus identify another important factor, the nationality of entrant firms, that affects the effect of entry on consumers under the welfare-maximizing tax policy. Our main finding is robust to the introduction of increasing marginal costs across firms. However, we find that (i) when foreign firms act as leaders, entry of (either domestic or foreign) firms always benefits consumers, which indicates that the moves of domestic and foreign firms (simultaneously or sequentially) are critical to the welfare implications under foreign competition. This result is in contrast to the finding by Wang et al. (2019b); and (ii) when efficient firms are partially foreign owned, entry of both domestic and foreign firms may hurt consumers under certain conditions. Hence, factors such as the mode of competition and the degree of foreign ownership are important for the competition authorities to develop relevant policies in an open economy.