4 Trade and Large Corporations:

Kodak versus Fuji

International Trade
ECON 1269
 Example: Coca-Cola in Malacca
Malaysia

A company with global reach: A shop advertises “Coca-Cola products” in the town of
Malacca, Malaysia.
Topics

1. Big Players in the Game of Trade

2. Background on Kodak, Fuji, and the War

3. Introducing Oligopoly

4. Autarky

5. Trade

6. Winners and Losers

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.

Fujufilm’s history
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.

Sounds like a
duopoly!
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
The model 2

• 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.

Autarky in the market for photographic film
Autarky in the market for photographic film 2

$306.59
$612.50
Autarky in the market for photographic film 3
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?
The model 3

• 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.
The model 4

• 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.
The model 5

• Kodak’s demand in the US is then:

o P = 11 - 2x10-8(QUS)

o P = 11 - 2x10-8(qUSK + qUSF)

o P = [11 - 2x10-8qUSF ] - 2x10-8qUSK

• Kodak’s MR curve in the US is then:

o MR = [11 - 2x10-8qUSF ] - 4x10-8qUSK

Oh yeah, what
one firm does
affects the
other!
The model 6

• 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.

The model 7

o MR = [11 - 2x10-8qUSF ] - 4x10-8qUSK

= $4.00

o Implies qUSK = 1.75x108 - (1/2)qUSF.

The reaction function tells

us how much Kodak
produces as a function of
what Fuji does!
Kodak’s reaction function in the US market
The model 8

• Do same thing for Fujifilm:

• Fix qUSK; get Fujifilm’s MR in the US.

• Set equal to Fujifilm’s MC in the US:

o $4.00 + $2.00 = $6.00.

• This gives qUSF as a function of qUSK:

o qUSF = 1.25x108 - (1/2)qUSK.

Fujifilm’s reaction function
The model 9

• Now, put these two pieces together.

• Cournot equilibrium is a pair of quantity choices on both reaction functions

simultaneously.

• Intersection of the two lines.

Kodak and Fujufilm’s reaction functions
Cournot equilibrium of 2 reaction functions
The model 10

Compare trade equilibrium with autarky.

Diagram: Compare trade equilibrium with
autarky
The model 11

• 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.
The model 12

• 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.

US welfare with trade

Profits from foreign sales

(remember, there’s a higher
MC)

Profits from
domestic
sales

Now, the welfare effects of trade.

Welfare effects of trade
Welfare effects of trade 2
Welfare effect of trade 3
Welfare effect of trade 4
Welfare effect of trade 5
Welfare effect of trade 6
Net welfare effects of trade
The model 13

• 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.

o Could have sold 200 million rolls at $7.00 under autarky, but chose not
to, because 175 million at $7.50 was more profitable.

o It’s even less profitable with the extra transport cost.

The model 14

• 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.

2 elements of welfare effects

• Welfare effects of trade have two elements.

1. Society gains from increased competition.

• Price is pushed closer to MC.

• Deadweight loss from monopoly is attenuated.

2. 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.

Big question

• 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.

1. No transport costs.

2. Asymmetric oligopoly.

3. Product differentiation.

4. Competition in prices.
1. 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?

1. The case without transport costs 2

• 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.
2. 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.
2. Asymmetric oligopoly 2

• 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.

2. Asymmetric oligopoly 3

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

• The reason is that trade facilitates the transfer of profits from Kodak to
Fujifilm.
3. Product Differentiation

• If Kodak film and Fuji film were two different products, it would be more likely
that:

1. The two corporations would benefit from trade.

2. The two societies would benefit from trade.

3. Product Differentiation 2

• Two big reasons:

1. The competition effect would be weaker.

2. Consumers would now benefit from a rise in product diversity due to

trade.
4. 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.

4. Price competition 2

• In this model, that yields a price of $6.00 in both markets (to within a cent).

• 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.
4. Price competition 3

• 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