The Landes and Posner result is not particularly general. By modifying the basic demand, cost, and competitive conditions facing the foreign firm, one can construct cases in which foreign supply is less responsive to changes in domestic prices than domestic fringe producers.
Foreign firms will not always find it profitable to divert products from their home market to export markets in response to a price increase in foreign markets. For example, if we alter the competitive structure of market B, so that the foreign firm faces rival competitors that limit its ability to raise its price in its home market to PL, then the foreign firm will supply OL to market B both before and after the price increase in market A. 82 This change means that there will be no diversion of output from market B to market A, so both the domestic fringe and the foreign competitor will increase their supply to market A by CD. While the elasticity of supply of the foreign fringe is still greater than the elasticity of supply of the domestic fringe, since the initial supply level of the foreign fringe is less (LC < OC), the quantity added to the market and thus the price effects of the additional supply from the two sources will be the same. 83
Changes in the foreign producer's production costs can further reduce its responsiveness to a domestic price increase. This can be visualized by looking at Figure 20.1 and noticing that if a foreign producer had a steeper marginal cost curve, its curve would cut PA to the left of D. Thus, if the foreign firm faced a limit price PL, and had steeper costs, the quantity response for the foreign producer could be less than that of the domestic fringe. 84 In particular, if the foreign producer faced a capacity constraint that caused its marginal cost curve to go up vertically at point C, the foreign supplier's elasticity of supply would be zero, and thus less than the domestic fringe's elasticity of supply.
The views expressed in this chapter do not necessarily reflect those of the Federal Trade Commission or of any individual Commissioner.