Foreign Entry and Domestic Welfare, With Application to Portuguese Life-Insurance

• Autor(a) principal: Barros, Pedro Pita
• Data de Publicação: 1991
• Outros Autores: Cabral, Luís M. B.
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/85379

We present a model of an industry which is subject to entry by foreign firms, and derive tests for the marginal as well as the global effect of foreign entry on domestic welfare. We show that marginal entry is welfare improving if and only if foreign form's market share is above threshold value, As a result, the optimum number of foreign firms is either zero or infinity. The global impact of foreign entry is positive if and only if the increase in total quantity (the consumer's surplus effect) is sufficient greater than the decrease in the domestic firm's Herfindahl index (the profit transfer effect). Applying the tests to the Portuguese life-insurance market, we find the global effect of foreign entry to be negative as of 1989. However, the marginal effect is likely to be positive, which implies that although foreign entry has decrease domestic welfare, additional foreign entry would increase domestic welfare.