European Journal of Political Economy vol:13 issue:1 pages:101-119
The effects of local content requirements (LCRs) are analysed under successive oligopoly, in the context of European Community LCRs imposed on Japanese firms. LCRs are only binding for foreign downstream firms which import intermediate goods from related suppliers. Although LCRs in this setting 'raise rival's costs', they enhance upstream producers' market power and raise the intermediate goods price, which negatively affects profits and market share of domestic downstream firms. LCRs have substantial anti-competitive output reducing effects, are generally ineffective in increasing domestic welfare, and may have undesirable income distribution effects. Under cooperative bargaining between domestic downstream and upstream producers, anti-competitive effects are reduced and the effectiveness of rent shifting is improved.