The effectiveness of protection through a fixed cost

Abstract

This paper identifies to which extent a discriminatory protection through a fixed cost can protect inefficient firms. The effectiveness of a discriminatory device is measured by a critical market size at which a marginal firm can survive.

Acknowledgements

I am grateful to the participants at the conference, ‘The Impact of the WTO Regime on Developing Countries’, on the 4–5 October 2002, at the World Institute for Development Economics Research, The United Nations University, Helsinki, Finland. All remaining errors are mine.

Notes

¹ The increase in market size S raises both the intercept and slope of a perceived demand curve, which accompanies both horizontal and vertical market growth. Neumann et al. (2001) categorize two kinds of market growth; ‘a horizontal growth of the market means that the number of people demanding a particular product grows such as forming a common market and globalization. Consumers are more likely to be inclined to low price products, resulting in a flatter demand curve; a vertical growth of market is depicted by a rise of intercept of demand curve, which follows from a change in preferences or income per capita that may raise consumers’ willingness to pay’.