Critical import supply elasticities and the ‘imports-as-market-discipline’ hypothesis

This paper formally examines the factors underlying how responsive imports must be to domestic prices (the ‘import supply elasticity’) in order to thwart an anticompetitive domestic price increase stemming from a merger – an issue that frequently arises in many antitrust reviews. Domestic firms face a fringe comprised of foreign firms who import their products into the domestic market. In the eyes of domestic consumers, these imports are viewed as imperfect substitutes in demand to the output produced by the domestic firms. The model is solved in terms of the ‘critical’ import supply elasticity that can then be used evaluate the ability of imports to constrain an anticompetitive price increase post-merger. Numerical simulations are conducted to consider the magnitude of perturbations in the model's exogenous parameters. Potential empirical extensions of the model are also considered.