Opening up to foreign competition : an analysis of Indian durable consumer goods industry

Abstract

We examine the most likely strategy of product differentiation by newly entering multinational firms when market reforms begin in a developing economy. We argue that incumbents in a non-contestable protected market do not have the usual advantages of an incumbent as in a standard sequential entry model of contestable markets. In this context we use a model of vertical product differentiation to argue that a new entrant will choose a higher quality product and a higher price given the income distribution profile brought in by the market reforms. We test the propositions empirically on the basis of firm level panel data for five Indian durable consumer goods industries.