Market Size, Cannibalization and Policy Competition for a Multiproduct Multinational Firm

This paper studies policy competition for a foreign-owned multiproduct monopolist firm producing two products that are horizontally differentiated between two countries of different size. We show that the equilibrium outcome of FDI competition is determined by the interaction between the market size effect and the cannibalization effect, and countries' subsidy policies. Welfare effects of competition for FDI are derived; in particular, we show that the competing countries may Pareto strictly gain from or Pareto strictly lose from FDI competition