Import expansion in the DRAM industry: Estimating the impact of the Semiconductor Trade Arrangement on competition

The 1986 U.S.-Japan Semiconductor Trade Arrangement (STA) was the culmination of a prolonged effort by U.S. firms to expand Japanese consumption of semiconductor imports. The STA serves as a canonical example of a “Voluntary Import Expansion” (VIE) treaty that seeks to expand imports in a previously closed market and increase competition. This analysis estimates the impact of the STA on competition and shows that the threats used to implement a VIE may, instead, coordinate firms' actions and increase collusion.; A two-period, multi-market, model of intraindustry trade demonstrates the collusive impact of VIEs. After the first period, the foreign firm faces a duty on sales in the domestic market if specified targets are not met. Reflecting uncertainties about implementation, this review process is stochastic, creating complex incentives that alter firms' production. The resulting equilibrium may achieve the VIE's targets, or it may not. It may result in lower profits to the domestic firm or an increase competition in one market at the expense of collusion in the other. Complete information is required to remove barriers in the foreign market. These results resolve the literature's ambiguity about the competitive impact of VIEs. Contrary to proponents' claims, VIEs are not easy to implement.; The STA provides an opportunity to test this model, using a new method of imputing firms' markups and conjectures. The Posterior Information Criterion (PIC) selects discrete values of the conjectural variation parameter and the determinants of firms' markups. The results from PIC deliver the first direct evidence that the STA increased collusion, reduced firms' responsiveness to market forces, and had a persistent effect. Alternate, non-robust criteria provide misleading results because of poor quality data and a potentially incomplete model.; Finally, the STA offers a case study of how the trade laws affect firms' negotiating strategies, both between governments and between firms and their governments. In a novel link, this work shows how the trade laws can help enforce and negotiate VIEs. More empirical work on trade policy is suggested, in order to uncover the effects of the recent spread of antidumping laws to developing countries.