Large Corporations and Trade: The case of Kodak and Fujifilm

!   Common undercurrent of anti-globalization rhetoric.

!   But Kodak thinks they’re a victim of globalization.

!   Two dominant players worldwide: Kodak and Fujifilm.

!   Kodak was the pioneer -- early 20th century.

!   Fujijilm was the upstart -- 1930’s.

1925 British Kodak girl poster. (Kodakgirl.com)!

!   Mid-century to 1970’s: Very little trade in film between US and Japan.

!   1970’s: Japanese import, FDI restrictions eased up.

!   Fuijifilm opened a US subsidiary: Intense advertising, PR, sports promotion.

!   1985: Kodak opened a Japanese marketing subsidiary.

Fujifilm at the US Open, September 8, 2005. Photo by drquimby.!Source: Tsurumi and Tsurumi (1999).!

Fujifilm’s progress in the US market.!Source: Tsurumi and Tsurumi (1999).!

!   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.

!   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.

!   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.

!   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 > A+B.

! 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.

!   I. No transport costs. !   II. Asymmetric oligopoly. !   III. Product differentiation. !   IV. Competition in prices.

!   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?

!   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.

!   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.

!   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.

!   Result: Japan gains from trade; the US does not.

!   The reason is that trade facilitates the transfer of profits from Kodak to Fujifilm.

!   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.

!   Two big reasons: !  (i) The competition effect would be weaker. !  (ii) Consumers would now benefit from a rise in

product diversity due to trade.

!   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.

!   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.

!   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.

!   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.