Strategic Trade Policies in International Rivalry When Competition Mode is Endogenous

Kangsik Choi, Ki-Dong Lee and Seonyoung Lim

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate government subsidy policies in which a home firm and a foreign firm choose to strategically set prices or quantities in a third market. We show that even though each firm can earn higher profits under Cournot competition than under Bertrand competition regardless of the nature of goods, choosing Bertrand competition is the dominant strategy for both firms. This can lead each firm to face a prisoners' dilemma in equilibrium. We also show that from the aspects of governments under subsidy regime, Cournot competition is more efficient than Bertrand competition when the goods are substitutes, and vice versa when the goods are complements. However, trade liberalization such as via free trade agreements brings about a change in the competition mode from Bertrand competition to Cournot competition if goods are substitutes. On the other hand, if goods are complements, there are no such a change in the competition mode and Bertrand competition prevails the market. Hence, a move toward free trade among countries increases not only profits of firms but also the welfare of both countries irrespective of the nature of goods.

Keywords: Subsidy; Cournot; Bertrand; Social Welfare; Prisoners' Dilemma. (search for similar items in EconPapers)
JEL-codes: F12 F13 L13 (search for similar items in EconPapers)
Date: 2014-11-06
New Economics Papers: this item is included in nep-bec, nep-com and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/59725/1/MPRA_paper_59725.pdf original version (application/pdf)

Related works:
Journal Article: STRATEGIC TRADE POLICIES IN INTERNATIONAL RIVALRY WHEN COMPETITION MODE IS ENDOGENOUS (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:59725

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().