Intra-Industry Adjustment to Import Competition:Theory and Application to the German Clothing Industry

This paper uses an oligopoly model with heterogeneous firms to examine how an industryadjusts to rising import competition. The model predicts that in the short run the least efficientfirms in the industry become inactive, surviving firms face a fall in output, mark-ups andprofits, and the average productivity of survivors increases. These pro-competitive effects ofimport penetration on the domestic industry disappear in the long run. The predictions for theshort run are confirmed in an empirical study of the German clothing industry....