ABSTRACT
What is the appropriate government action if firms, either foreign or domestic, have the power to affect the price in the domestic market? It is sometimes claimed that the most effective way to restrain a domestic monopoly is to allow foreign firms to compete with it. A clear statement of this opinion was given by Friedman and Friedman [45], p. 76:
The extent of competition at home is closely related to international trade arrangements. A public outcry against ‘trusts’ and ‘monopolies’ in the late nineteenth century led to the establishment of the Interstate Commerce Commission and the adoption of the Sherman Anti-Trust Law, later supplemented by many other legislative actions to promote competition. These measures have had very mixed effects. They have contributed in some ways to increased competition, but in others they have had perverse effects.
But no such measure, even if it lived up to every expectation of its sponsors, could do as much to assure effective competition as the elimination of all barriers to international trade. The existence of only three major automobile producers in the United States— and one of those on the verge of bankruptcy—does raise a threat of monopoly pricing. But let the automobile producers of the world compete with General Motors, Ford, and Chrysler for the custom of the American buyer, and the specter of monopoly pricing disappears.
