A Study of the Chinese Toy Market: Does an Oligopsony Structure Force Manufacturers to Cut Costs?

The growing incidence of product safety complaints pertaining to imported goods from China has been one of the most widely covered phenomena in 2007. China’s reputation as the factory of the world suffered immensely, a result of product recalls ranging from poisoned dog food to children’s toys saturated with lead. The Chinese government, as a result, attempted to repair their image as a producer of safe exports. These efforts culminated in the nationwide crackdown on the production of substandard goods and the arrest of 774 people on October 29, 2007 [1]. Pressures in the United States did not cease, however, with influential politicians, including 2008 presidential hopeful Barack Obama, continuing to call for a ban on all Chinese-made toys [2].1 Are increased regulation and protectionist measures necessary to maximize social welfare? We seek to study possible reasons for these seemingly sudden safety deficiencies, and hope to ascertain an optimal remedy. This study examines whether market power held by importing firms forces their respective Chinese contracting firms to undertake cost-cutting measures, whether such a market structure exists in the Chinese toy market, and a brief overview of possible economic justifications for Chinese firms to use hazardous materials in their production process in order to cut costs. 1It is not our intention to single out Senator Obama; his specific mention reflects the breadth and importance the ”China issue” has become in the United States, as opposed to a personal commentary.