Trade Liberalization and Aftermarket Services for Imports

Author Name ISHIKAWA Jota (Faculty Fellow, RIETI) / MORITA Hodaka (University of New South Wales) / MUKUNOKI Hiroshi (Gakushuin University)
Creation Date/NO. November 2014 14-E-065
Research Project Trade and Industrial Policies in a Complex World Economy
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We analyze the provision of repair services (aftermarket services that are required for a certain fraction of durable units after sales) through an international duopoly model in which a domestic firm and a foreign firm compete in the domestic market. Trade liberalization in goods, if not accompanied by the liberalization of service foreign direct investment (FDI), induces the domestic firm to establish service facilities for repairing the foreign firm's products. This weakens the firms' competition in the product market, and the resulting anti-competitive effect hurts consumers and reduces world welfare. Despite the anti-competitive effect, trade liberalization may also hurt the foreign firm because the repairs reduce the sales of the imported good in the product market. Liberalization of service FDI helps resolve the problem because it induces the foreign firm to establish service facilities for its own products.

Published: Ishikawa, Jota, Hodaka Morita, and Hiroshi Mukunoki, 2016. "Trade liberalization and aftermarket services for imports," Economic Theory, Vol. 62(4), pp. 719-764