Multi-Market Firms and Export Quota: Effects of Withdrawal of the Multi-Fiber Arrangement

Abstract

The international trade in goods and services is dominated by multi-market firms. A firm"s decision to sell in the domestic market vis-à-vis the foreign market depends on a number of factors including transport costs, price uncertainties and the barriers to trade. We study the effect of a reduction in non-tariff barriers or quotas on the optimal decision of firms to allocate output between the domestic market and the foreign market. We offer a theoretical analysis on how the firms reallocate sales between multiple markets when the exogenous barriers are lifted. We find that the theoretical conjecture might get valid support from the evolving pattern of exports by a large number of textile and apparel manufacturing firms originating in India. Principally, we obtain a condition under which the choice of the firm to operate in multiple markets depends on the relative strengths of how profit at the margin reacts to price uncertainty in one of the markets as compared to the effect of the sales in one market on the price of another. It seems that the withdrawal of the quota since 2005 has led to a greater focus on the domestic market for Indian firms and within the country there has also been an increased concentration of firms. We used the Hirschman-Herfindahl Index to measure if the Indian firms have become more concentrated in terms of sales during the previous two decades. The concentration of firms has unambiguously increased in the last two years.