Foreign Entry and Domestic Welfare: Can “Market Discipline” be Excessive

For most developed countries, "opening up" of the economy has meant the reduction of non-prohibitive tariffs and the easing or abolition of quantitative restrictions. For manydeveloping countries and economies in transition, however, it often requires the relaxation of autarkic policies such as the outright prohibition of imports or foreign investment in particular sectors. The conventional wisdom in economics is that this kind of reform is highly desirable and long overdue. Its virtues are easy to demonstrate in a standard competitive model, and the case becomes even stronger if the domestic industry is imperfectly competitive, for then trade liberalization serves as a surrogate anti-trust policy, with competitively-supplied imports imposing a price ceiling on the domestic industry.