A Reappraisal of Strategic Trade Policy

We investigate the welfare effect of an export subsidy/tax in the “third market” trade model. The conventional wisdom is that an export subsidy increases home welfare in a Cournot setting (Brander and Spencer 1985) and an export tax increases home welfare in a Bertrand setting (Eaton and Grossman 19...

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Bibliographic Details
Published in:Journal of industry, competition and trade competition and trade, 2015-12, Vol.15 (4), p.435-442
Main Authors: Schroeder, Elizabeth, Tremblay, Victor J.
Format: Article
Language:English
Subjects:
Competition
Duopoly
Economic Policy
Economics
Economics and Finance
Equilibrium
European Integration
Export taxes
Game theory
Games
Industrial Organization
International Economics
International trade
Microeconomics
Profit maximization
Profits
R & D/Technology Policy
Studies
Subsidies
Tax increases
Trade policy
Welfare economics
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Summary:We investigate the welfare effect of an export subsidy/tax in the “third market” trade model. The conventional wisdom is that an export subsidy increases home welfare in a Cournot setting (Brander and Spencer 1985) and an export tax increases home welfare in a Bertrand setting (Eaton and Grossman 1985). By allowing firms to compete in a Cournot-Bertrand duopoly model where one firm competes in output and the other competes in price, we are able to show that the conventional wisdom is incomplete. Optimal trade policy does not depend simply on whether firms compete in a Cournot or Bertrand type game. It only depends on whether the foreign firm competes in output or price.
ISSN:1566-1679
1573-7012
DOI:10.1007/s10842-015-0195-7