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On Assisting Domestic Industries under Bertrand Competition

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  • Dominik Egli
  • Frank Westermann

Abstract

In a homogeneous‐good duopoly game with a home and a foreign firm, which compete on prices, it has been shown that the optimal way to assist the domestic industry is by a production subsidy. The argument here is that the subsidy is used to keep potential competitive pressure on the foreign firm. This paper analyzes under which conditions this threat of entry of a subsidized home firm is credible. It is shown that in markets where the firms move before the government, a subsidy is not credible and dominated by a tariff in terms of welfare.

Suggested Citation

  • Dominik Egli & Frank Westermann, 2004. "On Assisting Domestic Industries under Bertrand Competition," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 435-440, August.
    • Handle: RePEc:bla:reviec:v:12:y:2004:i:3:p:435-440
    DOI: 10.1111/j.1467-9396.2004.00459.x
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