Product Market Competition in Transition Economies: Increasing Varieties and Consumer Loyalty.

Abstract

The collapse of communism brought about previously inexistent product market competition in transition economies. This paper analyzes such rivalry with a focus on some specific features of these markets. While inviting foreign multinationals is always beneficial for local consumers, cost reduction at the local producers (i.e., former SOE's) is necessary to realize the full-fledged benefits of such entry. Inefficient production by the former SOE's is particularly detrimental when the cost difference vis-à-vis foreign entrants is above a threshold level, because the more efficient entrants exploit their cost advantages to raise prices instead of pricing aggressively for market share. This in turn reduces the appeal of opening domestic markets to international trade to promote competition.