The competitive impact of international trade: the case of import liberalization of the Japanese oil product market

This paper analyzes the competitive impact of the recent import liberalizat ion of the Japanese oil product market. In response to the import liberaliz ation in March 1996, not only did the market price of gasoline decline shar ply but also its domestic production kept rising and did not decline relati ve to imports. Moreover, its price fell substantially before the actual lib eralization of the import. This paper demonstrates both theoretically and e mpirically that the theory of implicit cartel can explain such features of the impact of import liberalization very well. The paper also identifies th e significantly positive welfare impact of such liberalization due to the e xpansion of supply in a market with a large tax wedge between price and cos t and, possibly more importantly, due to the transformation of competitive conduct from unproductive investment for cartel-rent shifting into price cu ts. (C) 1999 Academic Press. Journal of Economic Literature Classification Numbers: L40, F12, K21.