Splitting the market

Nowadays, there is no economy that can be solely satisfied by domestic production and supply, and the imports are necessary. I discussed previously that the domestic supply side is the first to enter the market to fill the demand in the market then the foreign supply would enter the market to fully satisfy the total domestic demand. This point is based on several assumptions.

The first assumption is that domestic goods and services are more competitive in terms of their price levels. This assumption is very important because only when the domestic goods and services have price advantages, they can be the first to gain the market share for certain. This assumption is very realistic, as even in other countries production costs could be lower than the domestic production costs, governments can use tariffs to add more costs on their imports, thus making the costs for imports higher than the costs of domestic goods. The second assumption is that the market prices are set above their production cost levels.  This assumption implies another two assumptions that the market is not perfectly competitive and there is an excess of demand; otherwise, tariffs can fully prevent foreign firms from entering the domestic market, and prices are equal to their costs of production. Such assumption is more realistic than the perfectly competitive market assumption. In most cases, markets are not perfectly competitive, especially nowadays more and more markets have become price discriminated markets. The third assumption is that there is no dumping. This assumption ensures that prices are set above cost levels. This is realistic as many countries have anti-dumping regulations to forbid dumping.

Therefore, my previous assumption of how domestic firms and foreign firms split the market is very likely to be true.