UGF Lecture 3

Management > Global Firm > Dunning > Model 1 > Model 1 continued

Model 1 - perfect

Perfect competition

At first the market is in equilibrium in A and B and each firm makes "normal" profits. But if something causes a rise in demand in B, resulting in demand exceeding supply, firms in B can gain supernormal or excess profits in the short term.

The marketplace in B becomes more attractive, meaning more firms appear until supply catches up with demand, prices fall and profits return to normal.

During the "supernormal profit" period B becomes more attractive to firms from A, however they are unlikely to move to B. They must deal with an unfamiliar environment, meaning they do not have an OA and face the costs of being foreign. When profits return to normal, firms from A will in fact make a loss as a result of their foreignness.

Model 1 - imperfect

Model 2