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Export market correlation and strategic trade policy

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  • Mahmudul Anam
  • Shin-Hwan Chiang

Abstract

In the traditional models of strategic trade policy pioneered by Brander and Spencer, exports of the domestic firm, engaged in a Cournot-Nash competition with the foreign firm in a neutral market, must be subsidized to maximize national welfare. We demonstrate that when the firms play the Cournot-Nash game in two stochastic and positively correlated markets, it may be optimal to tax exports to the more volatile market while subsidizing it in the other. The policy combination reduces the amplitude of aggregate profit and raises the utility of the risk-averse firm in a manner similar to the theory of portfolio choice.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 33 (2000)
Issue (Month): 1 (February)
Pages: 41-52

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Handle: RePEc:cje:issued:v:33:y:2000:i:1:p:41-52

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Cited by:
  1. Yoshino, Hisao, 2011. "Strategic trade policy and non-linear subsidy : in the case of price competition," IDE Discussion Papers 287, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  2. Brown, Murray & Chiang, Shin-Hwan, 2002. "Unsystematic risk and coalition formation in product markets," International Journal of Industrial Organization, Elsevier, vol. 20(3), pages 313-338, March.

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