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A Reappraisal of Strategic Trade Policy

Elizabeth Schroeder () and Victor Tremblay ()

Journal of Industry, Competition and Trade, 2015, vol. 15, issue 4, 435-442

Abstract: 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. Copyright Springer Science+Business Media New York 2015

Keywords: Strategic trade policy; Cournot-Bertrand model; C72; D43; F11; F13 (search for similar items in EconPapers)
Date: 2015
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