Imperfect competition and import penetration

A simple Cournot model of production and import penetration is developed. The model suggests that the market structure variable, which exhibits a consistent and direct relationship with import penetration, is domestic concentration relative to foreign concentration, rather than industry concentration per se. US and Japanese data for 157 similarly defined manufacturing industries are used to investigate the interaction between penetration and industry structure. The results offer empirical support for the hypothesis that greater import penetration is associated with a higher concentration of US firms relative to their Japanese counterparts. It also is found that overall industry concentration and cost interact to influence import share, but differently than predicted. The overall level of concentration may be positively associated with the amount of import penetration when production costs are comparable at home and abroad. When costs diverge sharply, industry concentration level ceases to be a factor of consequence.