Cross-Border Alliances and Product Market Competition

Foreign manufacturers have the option of using sales networks of domestic rival firms to save local distribution costs. Such alliances may lead to collusion or create greater distortions because of the additional margins imposed by foreign firms, as shown in the theoretical literature. This paper empirically examines whether these outcomes are realized by alliances using Japanese antibiotics market data, where cross-border alliances are common. Empirical results show that the marginal costs of products supplied through cross-border alliances are lower than those supplied by foreign firms, suggesting that alliances are effective devices to reduce local distribution costs for foreign firms. Furthermore, my test results reveal little evidence of collusion or high markups caused by cross-border alliances.