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Optimal Trade Policy with Horizontal Differentiation and Asymmetric Costs

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  • Wen‐Jung Liang
  • Chao‐Cheng Mai

Abstract

This paper examines the optimal export policy under Bertrand competition when the products exhibit horizontal differentiation and production costs are asymmetric. The focus of this paper is on the product‐differentiation effect in the determination of the optimal export policy. We show that given that the equilibrium characteristic of a foreign firm's product R&D lies to the left‐hand side of its initial level , since the foreign firm has a unit cost advantage and the efficiency of its R&D technology is sufficiently low, a rise in the export subsidy of the domestic country increases a domestic firm's profits and then welfare by extending the degree of horizontal differentiation between the two products. Thus, the optimal export policy under Bertrand competition may turn out to be an export subsidy rather than an export tax. This result is in sharp contrast to that of Eaton and Grossman (1986).

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  • Wen‐Jung Liang & Chao‐Cheng Mai, 2010. "Optimal Trade Policy with Horizontal Differentiation and Asymmetric Costs," Review of Development Economics, Wiley Blackwell, vol. 14(2), pages 302-310, May.
    • Handle: RePEc:bla:rdevec:v:14:y:2010:i:2:p:302-310
    DOI: 10.1111/j.1467-9361.2010.00553.x
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    2. Naoto Jinji & Tsuyoshi Toshimitsu, 2014. "Strategic Investment Subsidies under Asymmetric Oligopoly," Review of Development Economics, Wiley Blackwell, vol. 18(3), pages 490-501, August.

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