Strategic Trade Policy with Endogenous Product Differentiation

Andreas Hoefele

Discussion Papers from University of Nottingham, GEP

Abstract: In this paper I develop a model of international duopoly, where firms invest in product differentiation. I show that firms have an incentive to free-ride on the investment of their rival, due to an externality generated by product differentiation. A further effect of product differentiation is the market-expansion effect, which induces consumers to increase their aggregate spending in the market. Depending on the strength of the two effects, the investments are either strategic substitutes or strategic complements. I link this result to strategic trade policy and show that the optimal policy depends on the strength of the market-expansion effect.

Keywords: R&D; Duopoly; Product differentiation; Industrial Policy; Strategic trade policy (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:not:notgep:10/23

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