Introduction

The statistical analysis in the Chapter 2 showed that the export pricing behavior of Japanese firms was often affected by foreign rivals' pricing in the world export market. Although this finding is useful, it is still very general and does not tell us about specific mechanisms through which foreign rivals set prices, and Japanese firms respond to these mechanisms. If a foreign price is determined by structural characteristics in the foreign market, export prices, and accordingly the profitability of Japanese firms, will be affected by those foreign structural characteristics as well. In other words, if an oligopoly in the foreign market elevates prices substantially above marginal costs, Japanese firms that are well-equipped to jump entry barriers will be attracted to enter and export to this market. This suggests that market structure in the foreign markets to which Japanese firms export should be taken into account in the analysis of their export pricing behavior. Figure 1.1 illustrates this point.

The aim of this chapter is to present a simple model that is an extension of the model presented in Chapter 2. If the incumbents elevate prices substantially above marginal costs in the foreign market, Japanese exporters to this market should earn positive profits, given their cost conditions. In the first part of this chapter, I will first identify the determinants of Japanese profits in the foreign market and estimate their values.