Optimal Trade Policy under Bertrand Competition and Incomplete Information

Young-Han Kim

Korean Economic Review, 1999, vol. 15, 123-146

Abstract: This paper examines the optimal export policy under incomplete information. In the model considered, foreign consumers do not know the product quality of the domestic ï¬ rm, which competes with the incumbent ï¬ rm in the foreign market. Conditions are derived under which the game has a unique intuitive separating equilibrium in which an exporter can credibly signal its quality. We demonstrate that the welfare eflect of the trade policy depends on two factors: the informational externality-reducing eflect, and the strategic eflect. When the product diï¬ erentiation and the quality variance is large, the optimal trade policy is an export subsidy, which reduces the upward price distortion. Otherwise, the optimal policy is an export tax for strategic reasons.

Keywords: International Trade Policy; Incomplete Information; Bertrand Competition (search for similar items in EconPapers)
JEL-codes: F12 F13 (search for similar items in EconPapers)
Date: 1999
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