In part, this is because the "right" answer depends on one's assessment of the costs associated with error. This is most easily illustrated in the merger context. Those who believe that horizontal mergers have a strong potential for creating efficiencies and that domestic concentration is unlikely to result in monopoly pricing regardless of the degree of imports will wish to "tilt" the analysis of import competition to downplay the concern that imports may not always be forthcoming in response to a domestic price increase. Those who are less sanguine about the societal benefits of horizontal mergers, and are more concerned that higher domestic concentration would, in the absence of imports, result in noncompetitive pricing, are more likely to attach a significant weight to the possibility that economic or political factors will eliminate the threat of imports and thus will want to define markets more narrowly to minimize the chances of permitting what might turn out to be a noncompetitive merger. 78
There is no question that foreign competition can exercise a significant restraint on the exercise of market power by domestic firms. There is also no question that the traditional approaches will often underestimate the significance of foreign competition by concentrating on historical snapshots of the degree of foreign competition and failing to take into account the added incentive provided to foreign firms of any attempt by domestic firms actually to exercise market power. However, the approaches that have been suggested to deal with this problem carry with them the possibility of overstating the degree to which foreign competition can be depended upon in any given instance. We can only suggest that policy makers consider carefully their own degree of risk aversion along with the theoretical and empirical analysis we have offered in deciding how to deal with the question of the significance to attach to the potential for foreign competition.
To illustrate the lack of robustness in the Landes and Posner result, consider a market in which the foreign producer that supplies imports to the United States has market power in its home market (which is protected by barriers to entry, such as quotas) and price discriminates between the U.S. and its home markets. Figure 20.1 illustrates this case. In this figure, MC represents the marginal cost of production for the foreign firm and the domestic fringe. DB. and MRB represent the demand and marginal revenue curves faced by the foreign firm in its home market, and P0A represents the initial market price the foreign firm faces in market A (perhaps in the United States).