At the outset of import liberalization, most economists expected a significant drop in the prices of domestic goods that faced foreign competition. However, it is now generally acknowledge that a significant drop in prices of those goods has not occurred. A common claim is that the prices did not drop significantly because the major importers of many imported goods were also the domestic producers of competing goods. The objective of this paper is to analyze the welfare effect of importation by domestic firms that produce competing goods, to identify the factors that facilitate such business practices, and to formulate a policy that could improve the welfare. We proved that importation by competing domestic firms definitely raises the prices of both imported and domestic goods compared to the situation where foreign goods are imported by non-producers, ceteris paribus. The intuition behind this result is that since a producer-importer is essentially a cartel, its overall profit maximization requires reduced competition between the products that it sells. On the other hand, if a producer importer is more efficient at distribution than a simple importer, the comparison between the two cases is a priori indeterminate. We also find that the industries in which domestic producers are actively involved in importing competing goods are the ones in which the distribution channels are tightly controlled by importer-producers. This finding suggests that exclusive dealing contracts, which work as an entry barrier, may be the source of importing by domestic producers. We argue that in a country such as Korea, where financial market is highly incomplete, tight control of the distribution channels by oligopolistic manufacturers is likely to be an effective entry barrier that leads to importing by domestic producers of similar goods. We further argue that seemingly superior distribution costs of importer producers is likely to be a result of market foreclosure which would disappear once the entry barrier of exclusive dealing contracts is removed. Above findings suggest that market imperfections are the source of importation by domestic competitors, which in turn constitutes a market imperfection in itself and reduces consumer welfare. As potential remedies, we considered three alternatives; direct price control by the government over the imported goods sold by major domestic producers, regulation of trade itself between major producers, and regulation of exclusive dealing contracts. For reasons both theoretical and practical, we find that the last alternative is the most attractive. Prohibiting exclusive contracts between manufacturers and dealers in industries where exclusive dealing contracts are a significant entry barrier is expected to break up the importer-producer cartel and improve the welfare.