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Copyright 2012 Horatio M. Morgan. This is an open access article distributed under the Creative Commons
Attribution License unported .0! "hich permits unrestricted use! distribution! and reproduction in any
medium! provided that original "or# is properly cited. Contact author$ Horatio M. Morgan %&mail$
horatio.morgan'ryerson.ca

An Industrial Organization Approach to the
Study of Export Intensity: Strategic Market
Interactions and Export Intensity

Horatio M. Morgan

Global Management Studies Department Ted Rogers School of Management Ryerson University, Canada
__________________________________________________________________________________________________________________

Abstract

(n developing countries characteri)ed by relatively small domestic mar#ets! local *irms may have to
internationali)e in order to reali)e their gro"th potential. +espite the *ormidable challenges that
may accompany the internationali)ation process! globally&oriented managers and domestic
policyma#ers may e**ectively cra*t coherent e,port&promotion strategies and policies! respectively!
i* they have a solid understanding o* the determinants o* e,port per*ormance. -hile the empirical
e,port per*ormance literature in the *ield o* international business .(/0 has the potential to
contribute to"ards this end! it appears to be hampered by a paucity o* rigorous theoretical
*rame"or#s. (n the virtual absence o* a "ell&articulated direction on ho" to *ill this theoretical void!
this paper ma#es a case *or the application o* industrial organi)ation .(10&based modeling in this
line o* research. (t *ormulates a model o* e,porting in the conte,t o* mar#et structures
characteri)ed by a monopoly! and a .symmetric linear0 2tac#leberg duopoly "ith price
discrimination. 3nder this theoretical *rame"or#! it is *ound that the 2tac#leberg leader has an
e,port intensity o* )ero! "hile the 2tac#leberg *ollo"er has an e,port intensity o* one&hal*. /ut at an
e,port intensity o* t"o&thirds! the price&discriminating monopolist has the largest e,port intensity.
These analytical results provide insights into the so&called 4industry e**ects5 phenomenon that has
been noted in empirical e,port per*ormance studies! and strengthens the theoretical argument *or
the conventional use o* industry&dummy variables to control *or hypothesi)ed industry e**ects.
More generally! this paper signals a potentially *ruit*ul direction *or (1&based modeling in the
e,tant empirical e,port per*ormance literature.

Key ords: %,port (ntensity6 (ndustrial 1rgani)ation6 (nternationali)ation6 7rice +iscrimination.
888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888

Introduction

(n an increasingly competitive global
economy! the internationali)ation o* *irms is
a potentially di**icult underta#ing that is
li#ely to preoccupy globally&oriented
managers and domestic policyma#ers ali#e.
This is particularly so *or developing
economies "here e,port&orientation may be
imperative due to relatively small domestic
mar#ets! among other *actors! that constrain
the gro"th opportunities o* local *irms .Luo
and Tung! 20090. (n this conte,t! the cra*ting
o* e,port&promotion strategies and policies is
a critical tas#. Ho"ever! "ithout a solid
understanding o* the determinants o* e,port
per*ormance! managers and domestic
policyma#ers may not be in a position to
con*idently! and e**ectively develop e,port&
promotion strategies and policies!
respectively.

2tarting "ith the seminal "or# o* :ohanson
and ;ahlne .1<990! the long&standing "or# o*

:ournal o* =esearch in (ndustrial 1rgani)ation 2


(/ scholars on e,porting at the *irm&level! has
the potential to contribute to the design o*
e,port&promotion strategies and policies.
Among the various research endeavors in the
(/ *ield! much intellectual energy has been
devoted to the *irm&level e,port per*ormance
research agenda. This research agenda is an
empirically&oriented one! "ith a notable
long&standing *ocus on the relationship
bet"een *irm&si)e and e,port intensity! as
measured by the ratio o* *oreign sales to total
sales.

The conventional "isdom is that there is a
positive relationship bet"een *irm&si)e and
e,port intensity. -hile some empirical
studies appear to provide evidence in
support o* this e,pected positive relationship
.Ma>occhi et al! 200?6 Moini! 1<<?6 -agner!
1<<?0! others suggest that a systematic
relationship does not e,ist ./onaccorsi!
1<<26 7la&/arber and Alegre! 20090. There is
even evidence that a negative relationship
may e,ist bet"een *irm&si)e and e,port
intensity .7atibandla! 1<<?0. Thus! on one o*
the most long&standing issues in the (/ *ield!
the empirical e,port per*ormance literature
has *ailed to yield conclusive results that
provide a clear direction *or managers and
policyma#ers *aced "ith the challenge o*
designing e,port&promotion strategies and
policies! respectively.

-hile the theoretical shortcomings o* the
empirical e,port per*ormance literature have
been generally ac#no"ledged .@atsi#eas et
al! 20006 2ousa! 200A0! there is virtually no
"ell&articulated direction on a theoretical
approach that has the potential to not only
yield consistent results on the *irm si)e&
e,port intensity relationship in particular!
but also engender greater con*idence in the
(/ empirical e,port per*ormance research
agenda in general. This paper ma#es a *irst&
step in the direction o* the latter.

The articulation o* rigorous theoretical
arguments in support o* empirical
propositions constitutes a basic! yet
important e**ort that may engender greater
con*idence in the (/ empirical e,port
per*ormance research agenda. The merit o*
an (1&based approach is demonstrated in the
conte,t o* the conventional use o* industry&
dummy variables to control *or 4industry
e**ects5 "hen estimating the marginal e**ect
o* *irm&si)e on e,port intensity ./onaccorsi!
1<<26 Ma>occhi et al! 200?6 7la&/arber and
Alegre! 20096 -agner! 20010. 3nder the (1&
based theoretical *rame"or# developed in
this paper! it is sho"n that the strategic
interaction bet"een *irms! together "ith
cross&national di**erences in consumersB
"illing&to&pay! may account *or di**erences in
e,port intensity across *irms. This #ey
analytical result provides insights into the
styli)ed 4industry e**ects5 phenomenon! and
strengthens the theoretical argument in
support o* the common use o* industry&
dummies in empirical e,port per*ormance
studies.

The remainder o* this paper is organi)ed as
*ollo"s. 2ection t"o derives the optimal
Cuantities o* domestic and *oreign sales and
the corresponding prices! as "ell as e,port
intensity! under a discriminating monopolist
model o* e,porting. 2ection three e,tends
this discriminating monopolist model o*
e,porting by considering a model o*
e,porting under a .symmetric linear0
2tac#leberg duopoly "ith price
discrimination. 2ection *our discusses the #ey
analytical results. 2ection *ive summari)es
and concludes.

Monopoly ith !rice "iscri#ination and
Export Intensity

(n this section! ( derive the analytical results
o* the conventional model o* the e,porting
*irm as a discriminating monopolist across its
home& and *oreign&mar#et .Hirsch and Adar!
1<9A0. (n addition! ( de*ine and compute its
e,port intensity.

Consider a single *irm that produces a
homogeneous product at a constant marginal
cost c > ; that is! the cost *unction is linear
:ournal o* =esearch in (ndustrial 1rgani)ation




in output.
1
Alternatively! the constant
marginal cost assumption means that the
*irm employs a constant return to scale
technology. The *irm sells Cuantities q
L
and
q
P
to a local and a *oreign mar#et!
respectively. The unit prices o* the product in
the local and *oreign mar#et are given by the
linear .inverse0 demand curves! p
L
(q
L
) = o
bq
L
! and p
P
(q
P
) = o bq
P
! respectively. (n
addition! it is assumed that the *oreign
mar#et is per*ectly competitive! and the
monopolist *aces the entire do"n"ard
sloping demand curve in the local mar#et. (t
is *urther assumed that the *irm can
e**ectively prevent the resale o* the product
among customers in the local and *oreign
mar#et6 alternatively! there e,ists transaction
costs .e.g.! shipping and communication
costs0 that ma#e it unpro*itable *or individual
customers to engage in the secondary trading
o* the product bet"een the local and *oreign
mar#et.

The pro*it *unction o* the monopolist is given
by$

n
m
= (o bq
L
)q
L
+(o bq
P
)q
P
c .10

-here = q
L
+ q
P
is the total Cuantity sold
in both the local and *oreign mar#et. Let
EI
m
q
P
m
( q
L
m
+ q
P
m
) denote the
eCuilibrium e,port intensity o* the
discriminating monopolist at the optimal
Cuantities q
L
m
and q
P
m
.

The analytical results under a monopoly "ith
price discrimination are summari)ed in the
*ollo"ing proposition$

!roposition $ (* price discrimination is
permitted under a monopoly "ith t"o
groups o* consumers! local .,0 and *oreign
.-06 then *or o > c > , the eCuilibrium pairs

1
The use o* a linear cost *unction rather than a Cuadratic
one is a matter o* convenience! and is largely
inconseCuential in the conte,t o* this study. Ho"ever! in
other conte,ts! such as the study o* the 4merger
parado,5 in hori)ontal mergers .2alant! 2"it)er and
=eynolds! 1<D0! the use o* a Cuadratic cost *unction
rather than a linear one may be an important
consideration .e.g.! 7erry and 7orter! 1<D6 Hey"ood
and McEinty! 2009! 200D0.
o* Cuantities and prices *or the local and
*oreign mar#ets! and the e,port intensity are
respectively$

{q
L
m
, q
P
m
] = {(o c) 2b , (o c) b ]

{p
L
m
, p
P
m
] = {(o c) 2 + c , c]

EI
m
= 2*

The proo* o* proposition 1 *ollo"s *rom a
straight*or"ard optimi)ation o* the pro*it
*unction in .10 "ith respect to q
L
and q
P
.
2ince the pro*it *unction is concave in q
L
! the
optimal output q
L
m
is the solution to the *irst&
order condition on
m
oq
L
= HR
L

HC = , "here HR
L
and HC denote the
marginal revenue in the *oreign mar#et and
the common marginal cost! respectively6 and
the per*ect competition optimal Cuantity q
P
m

is the solution to p
P
HC = . (n
eCuilibrium! the condition HR
L
= p
P
= HC
holds. 1nce the eCuilibrium Cuantities! q
L
m

and q
P
m
! are obtained! the computation o*
e,port intensity is a trivial e,ercise *or the
reader.

From proposition 1! price discrimination is
achieved6 that is! q
L
m
< q
P
m
! and p
L
m
> p
P
m
. At
an e,port intensity o* t"o&thirds! the
discriminating monopolist is an e,porting
*irm that sells t"o&thirds o* its total output
abroad.

Stackleberg "uopoly ith !rice
"iscri#ination and Export Intensity

(n this section! ( e,tend the discriminating
monopolist model o* e,porting by
considering a special case o* @utluBs .200<0
2tac#leberg model o* competition "ith price
discrimination .@utlu! 200<0.
2
3nder this
2tac#leberg duopoly model! *irm 1 behaves
li#e the 2tac#leberg leader! "hile *irm 2
operates as the 2tac#leberg *ollo"er.
Ho"ever! both *irms produce a homogeneous
product at the same marginal cost c > . This
cost&symmetry assumption suggests that

2
@utluBs .200<0 is a dynamic version o* Ha)ledineBs
.200G0 Cournot model "ith second degree price
discrimination.
:ournal o* =esearch in (ndustrial 1rgani)ation A


both *irms employ the same constant returns
to scale technology6 there*ore! di**erences in
*irm&si)e! or technological capabilities are not
potential determinants o* e,port intensity
under this theoretical *rame"or#.

2imilar to the setup under the monopoly
model "ith price discrimination in the
previous section! ( assume that there are t"o
groups o* consumers! local .,0 and *oreign
.-0! "ho populate a local and a *oreign
mar#et! respectively. As be*ore! individual
consumers across these mar#ets are
assumed to *ace transaction costs that ma#e
it unpro*itable *or them to resell the product
across mar#ets a*ter initial purchases6 thus!
price discrimination is also permissible in
this setting. -hen ordered by their
reservation prices! it is *urther assumed that
the local mar#et comprises a bin o*
consumers .4high&valued consumers50 "ith a
uni*ormly higher range o* valuations *or the
product relative to the bin o* consumers in
the *oreign mar#et .4lo"&valued
consumers50.

(t is assumed that the linear .inverse0
demand curves *or the local and *oreign
mar#ets are respectively$

P
L
= o b(q
L
!
+ q
L
2
) .20

P
P
= o b(q
L
!
+ q
L
2
+ q
P
!
+ q
P
2
) .0

-here P
L
and P
P
are the unit prices o* the
product in the local and *oreign mar#et!
respectively6 and q
L
]
and q
P
]
denote the
Cuantities sold by *irm ] e {!,2] in the local
and *oreign mar#et! respectively. Finally! it is
assumed that each consumer "ithin each
group buys at most one unit o* the product.

The results under a 2tac#leberg duopoly "ith
price discrimination are summari)ed in the
*ollo"ing proposition$

!roposition % (* price discrimination is
permitted in a .symmetric linear0
2tac#leberg duopoly "ith t"o groups o*
consumers! local .,0 and *oreign .-06 then *or
o > c > , the pairs o* eCuilibrium Cuantities!
prices and e,port intensities *or the
2tac#leberg leader .4*irm 150 and the
2tac#leberg *ollo"er .4*irm 250 are
respectively$

{q
L
s!
, q
L
s2
] = {(o c) 2b , (o c) .b ]

{q
P
s!
, q
P
s2
] = {, (o c) .b ]

{p
L
s
, p
P
s
] = {(o c) * + c , (o c) . + c ]

{EI
s!
, EI
s2
] = {, ! 2 ]

The proo* o* proposition 2 is provided in the
appendi,.

"iscussion

(n @utluBs .200<0 version o* 2tac#leberg
duopoly "ith price discrimination! "e have
the general case involving / groups o*
consumers ordered in bins according to their
reservation prices6 proposition 2 above
constitutes a special case "hen k =
2. There*ore! the analytical results o* @utlu
.200<0 also obtain in proposition 26 that is!
the 2tac#leberg leader supplies the product
only to the local mar#et! "hile the
2tac#leberg *ollo"er supplies the product to
both mar#ets. According to proposition 2! the
2tac#leberg leader supplies the monopoly&
output to the local mar#et! "hile the
2tac#leberg *ollo"er sells one&hal* o* its total
output to the *oreign mar#et. This implies
that the 2tac#leberg leader targets the high&
valued local consumers! "hile the
2tac#leberg *ollo"er eCually serves both the
high& and lo"&valued group o* consumers at
home and abroad! respectively. At the same
time! "hen the sales decisions o* the
2tac#leberg leader and *ollo"er are ta#en
together! price discrimination is e**ectively
obtained6 that is! p
L
s
> p
P.
s


Finally! in comparing the analytical results o*
e,porting under a monopoly and a
2tac#leberg duopoly "ith price
discrimination! an interesting in*erence can
be dra"n$ the characteri)ation o* the
competitive structure has implications *or
the e,port orientation o* *irms in a given
? :ournal o* =esearch in (ndustrial 1rgani)ation




mar#et or industry. (mportantly! the
analytical results under a 2tac#leberg
duopoly "ith price discrimination are
essentially induced by the interdependency
in the output choices o* the t"o *irms
engaged in a strategic game. 3nli#e the
2tac#leberg leader and *ollo"er! the
discriminating monopolist is not engaged in
such a strategic game. (n the absence o*
strategic considerations! the discriminating
monopolist has a higher e,port intensity than
the 2tac#leberg *ollo"er6 that is!
EI
m
= 2 * > EI
s2
= ! 2. (n practice! a
discriminating monopolist and a 2tac#leberg
*ollo"er may be any t"o *irms that operate
in t"o di**erent industries. Thus! "hat may
be captured as an 4industry e**ect5 on e,port
intensity in a cross&sectional study o* these
*irms! may very "ell re*lect *undamental
di**erences in the strategic mar#et
interaction across industries.

&onclusion

This paper demonstrates a potentially *ruit*ul
avenue through "hich the (1 *ield may
address the theoretical void that appears to
limit the contribution o* the (/ empirical
e,port per*ormance literature to"ards the
development o* coherent e,port&promotion
strategies and policies. (t does so by
presenting an (1&based *rame"or# that
sheds light on the styli)ed 4industry e**ects5
phenomenon! and o**ers a *ormal >usti*ication
*or the common use o* industry&dummies in
empirical e,port per*ormance studies. 3nder
this (1&based *rame"or#! it is sho"n that the
strategic interaction bet"een *irms!
combined "ith cross&national di**erences in
consumersB "illing&to&pay! may lead to
di**erences in the optimal ratio o* *oreign
sales to total sales across *irms. This #ey
analytical result is independent o* the scale o*
operation .i.e. *irm si)e0. Finally! it suggests
that the underlying competitive structure o* a
particular mar#et or industry should be
sub>ect to more detailed analysis than is
currently the case in the e,tant e,port
per*ormance literature. For this reason! the
(1 *ield has a potentially signi*icant
contribution to ma#e in this line o* research.
Acknoledge#ent

( "ould li#e to than# an anonymous re*eree
*or providing constructive comments and
corrections! and 2harlene Morgan *or proo*&
reading the earlier dra*ts o* this paper. All
remaining errors are mine.

'eferences

/onaccorsi! A. .1<<20. H1n the =elationship
bet"een Firm 2i)e and %,port (ntensity!H
Journal of International 0usiness 1tudies$
2.A0! G0?&G?.

Ha)ledine! T. .200G0. H7rice +iscrimination in
Cournot&Iash 1ligopoly!H 2conomic ,etters$
<.0! A1&A20.

Hey"ood! :. 2. J Mcginty! M. .2009a0.
HConve, Costs and the Merger 7arado,
=evisited!H 2conomic 2n3uir4 A?.20! A2&A<.

Hey"ood! :. 2. J Mcginty! M. .2009b0.
KLeading and Merging$ Conve, Costs!
2tac#leberg! and the Merger 7arado,!K
2conomics 0ulletin 12.120! 1&9.

Hirsch! 2. J Adar! A. .1<9A0. HFirm 2i)e and
%,port 7er*ormance!H 5orld &e6elopment$
2.90! A1&AG.

:ohanson! :. J ;ahlne! :. .1<990. HThe
(nternationali)ation 7rocess o* the Firm$ A
Model o* @no"ledge +evelopment and
(ncreasing Foreign Commitments!H Journal of
International 0usiness 1tudies$ D.10! 2&2.

@atsi#eas! C. 2.! Leonidou! L. C. J Morgan! I.
A. .20000. HFirm&Level %,port 7er*ormance
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+evelopment!H Journal of the %cadem4 of
7ar/eting 1cience$ 2D.A0! A<&?11.

@utlu! L. .200<0. H7rice +iscrimination in
2tac#leberg Competition!H Journal of
Industrial 2conomics$ ?9.20! GA.

Luo! L. J Tung! =. L. .20090. H(nternational
%,pansion o* %merging Mar#et %nterprises$ A
2pringboard 7erspective!H Journal of
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International 0usiness 1tudies$ D.A0! AD1&
A<D.

Ma>occhi! A.! /acchiocchi! %. J Mayrho*er! 3.
.200?0. HFirm 2i)e! /usiness %,perience and
%,port (ntensity in 2mes$ A Longitudinal
Approach to Comple, =elationships!H
International 0usiness Re6iew$ 1A.G0! 91<&
9D.

Moini! A. H. .1<<?0. HAn (nCuiry into
2uccess*ul %,porting$ An %mpirical
(nvestigation 3sing a Three&2tage Model!H
Journal of 1mall 0usiness 7anagement$ .0!
<&2?.

7atibandla! M. .1<<?0. HFirm 2i)e and %,port
/ehavior$ An (ndian Case 2tudy!H Journal of
&e6elopment 1tudies$ 1.G0! DGD&DD2.

7erry! M. @. J 7orter! =. H. .1<D?0. H1ligopoly
and the (ncentive *or Hori)ontal Merger!H
%merican 2conomic Re6iew 9?.10! 21<&229.

7la&/arber! :. J Alegre! :. .20090. HAnalysing
the Lin# bet"een %,port! (nnovation and 2i)e
in a 2cience /ased (ndustry!H International
0usiness Re6iew$ 1G.0! 29?&2<.

2alant! 2. -.! 2"it)er! 2. J =eynolds! =. :.
.1<D0. HLosses *rom Hori)ontal Mergers$
The %**ects o* an %,ogenous Change in
(ndustry 2tructure on Cournot&Iash
%Cuilibrium!H 8uarterl4 Journal of 2conomics
<D.20! 1D?&1<<.

2ousa! C. M. 7. .200A0. H%,port 7er*ormance
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7ar/eting 1cience Re6iew$ 200A.<0. Accessed
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http$MMamsrevie".orgMarticlesMsousa0<&
200A.pd*.

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9.10! 2<&<.




Appendix

For a 2tac#leberg duopoly "ith price
discrimination! "e have a t"o&period!
*ollo"er&leader strategic game involving *irm
1! and *irm 2 as the leader and *ollo"er!
respectively. At time t = !! *irm 1 optimally
chooses q
L
!
and q
P
!
based on the output
decision rules it e,pects the *ollo"er to apply
in period t = 2. (n the second period! t = 2!
the output choices o* *irm 1 become #no"n
to *irm 2! "hich then chooses q
L
2
and q
P
2
in
accordance "ith the output decision rules
that *irm 1 had e,pected. (n game theoretic
terms! 4bac#"ards5 induction is used to
obtain the 1ubgame 9erfect :ash 23uilibrium
as the solution to this leader&*ollo"er
strategic game6 that is! ta#ing the output
choices o* the leader as given! the *ollo"erBs
optimal output decision rules are determined
at t = 2. The leaderBs optimal output choices
are then determined based on the optimal
decision rules o* the *ollo"er.

At t = 2: given the linear demand *unctions
in .20 and .0! and the linear cost *unction!
c(q

]
) = cq

]
*or i e {I, F] and ] e {!,2], the
pro*it *unction o* *irm 2 is given by$

n
2
=|o b(q
L
!
+ q
L
2
) c]q
L
2
+|o
b(q
L
!
+ q
L
2
+ q
P
!
+ q
P
2
) c]q
P
2
.A0

2ince n
2
is concave in q
L
2
and q
P
2
! the ma,ima
*or q
L
2
and q
P
2
are given by the *irst&order
conditions on
2
oq
L
2
= and on
2
oq
P
2
= !
respectively. 2traight*or"ard calculations
yield$

n
2
q
i
2
= o c bq
L
!
bq
L
2
2bq

2
= *or
i e {I, F] .?0

2ince on
2
oq

2
= *or i e {I, F]! it *ollo"s
that$

= on
2
oq
P
2
on
2
oq
L
2
= bq
L
2
bq
P
!
bq
P
2

.G0

2olving .G0 *or q
L
2
yields$

q
L
2
= q
P
!
+ q
P
2
.90
9 :ournal o* =esearch in (ndustrial 1rgani)ation




2ubstituting .90 into .?0 *or i = F! and
solving *or q
P
2
yields$

q
P
2
=
u-c
*b

!
*
(q
L
!
+ q
P
!
) .D0

At t = !: ( no" solve the pro*it ma,imi)ation
problem o* *irm 1 sub>ect to *irm 2Bs optimal
decision rules in .90 and .D0. The pro*it
*unction o* *irm 1 is given by$

n
!
=|o b(q
L
!
+ q
L
2
) c]q
L
!
+|o
bqI!;qI2;qF!;qF2<cqF! .<0

To setup the optimi)ation problem *or *irm 1!
substitute .90 and .D0 into .<0 to get the
*ollo"ing pro*it *unction$

n
!
=j
2
*
(o c)
2
*
bq
L
!

!
*
bq
P
!
[ q
L
!
+j
!
*
(o
c<!*bqI!<2*bqF!qF! .100

2ince the pro*it *unction in .100 is concave in
q
L
!
and q
P
!
! the ma,ima *or q
L
!
and q
P
!
are given
by the *irst&order conditions on
!
oq
L
!
=
and on
!
oq
P
!
= ! respectively.
2traight*or"ard calculations yield the
*ollo"ing eCuilibrium Cuantities *or *irm 1$

q
L
s!
=
u-c
2b
.110

q
P
s!
= .120

To obtain the eCuilibrium Cuantities *or *irm
2! substitute .110 and .120 into .90 and .D0 to
get$

q
L
s2
= q
P
s2
=
u-c
.b
.10

To obtain the eCuilibrium prices! p
L
s
and p
P
s
!
plug the relevant eCuilibrium Cuantities into
.20 and .0 to get$

p
L
s
=
u-c
*
+c .1A0

p
P
s
=
u-c
.
+ c .1?0

The eCuilibrium e,port intensity *or *irm
] e {!,2] is de*ined by$

EI
s]
=
q
F
s]
q
L
s]
+q
F
s]
.1G0

2ubstitute the eCuilibrium Cuantities *or *irm
1 and *irm 2 into .1G0 to get$

EI
s2
=
!
2
> EI
s!
= .190