Measuring Competitiveness in Twos

Improvements in competitiveness can be achieved through policy initiatives, but the success of these policies will depend upon the way that firms and consumers respond. This paper establishes the conditions under which a policy change can lead to an improvement in the competitiveness of a Canadian firm. There are two firms (Canadian, U.S.) each with two brands and each making sales in two markets (Canada, U.S.) and two consumers, one in Canada and one in the U.S. Equilibrium is shown to depend on inverse compensated demand function coefficients, the conjectured best response coefficients for each firm and marginal cost functions for each firm. An improvement in competitiveness from an investment in public infrastructure in Canada is shown to depend upon initial sales ratios and the by sign and size of the best response of the Canadian firm as conjectured by the U.S. firm. It is also shown how the policy may have unintended effects. The model can be used to derive a range of other results and these potential uses are outlined.