Free Entry, Quasi-free Trade, and Strategic Export Policy

Craig T Schulman

Review of International Economics, 1997, vol. 5, issue 1, 83-100

Abstract: This paper analyzes governments' choices between strategic export subsidies and free trade as a commitment when firms are free to enter or exit in response to these choices. Entry and exit is treated as a discrete process. Within the context of a four-stage game, two types of equilibria emerge: a quasi-free-trade equilibrium in which one of the two governments commits to free trade, while the other has a Nash equilibrium subsidy that is zero and bilateral export subsidies. Concerning welfare effects, if fixed costs are large enough, both countries achieve a welfare gain relative to free trade. Copyright 1997 by Blackwell Publishing Ltd.

Date: 1997
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