Strategic Trade Policies for Small Countries

Ramana Polavarapu () and Ashish Vaidya ()
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Ramana Polavarapu: Department of Economics, University of Colorado at Denver, Postal: Campus Box Number: 181, Post Box 173364, Denver CO, USA, http://www.ucdenver.edu/
Ashish Vaidya: Department of Economics, California State University, Channel Islands, Postal: Professional Building 217, , CSU Channel Islands, , One University Drive, Camarillo, CA 93012, USA, http://www.csuci.edu/

Economia Internazionale / International Economics, 1994, vol. 47, issue 2-3, 207-217

Abstract: In oligopolistic markets characterized by Bertrand competition, we show that a small country gains from trade by passively following the price leadership of a larger country. We examine the nature of optimal trade policy far the small country and show that an export tax is optimal. This form of government intervention by the sail entry induces the larger country to be a price leader, by making the small reentry sufficiently inefficient. We show that the Stackleberg equilibrium with the larger country being a price leader is preferred to the Bertrand.Nash equilibrium, for both countries.

Date: 1994
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