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Endogenous Market Structures And Strategic Trade Policy

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  • Federico Etro

Abstract

We characterize the optimal export promoting policies for international markets whose structure is endogenous. Contrary to the ambiguous results of strategic trade policy for markets with a fixed number of firms, it is always optimal to subsidize exports as long as entry is endogenous, under both competition in quantities and in prices. With homogenous goods the optimal export subsidy is a fraction 1/€ of the price, where € is the elasticity of demand, the exact opposite of the optimal export tax in the neoclassical trade theory. A similar argument can be applied to show the general optimality of R&D subsidies and of competitive devaluations to promote exports in foreign markets where entry is endogenous.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 52 (2011)
Issue (Month): 1 (02)
Pages: 63-84

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Handle: RePEc:ier:iecrev:v:52:y:2011:i:1:p:63-84

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References

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  1. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 865-915, August.
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  5. Engel, Charles, 2000. "Local-currency pricing and the choice of exchange-rate regime," European Economic Review, Elsevier, vol. 44(8), pages 1449-1472, August.
  6. colciago, andrea & Rossi, Lorenza, 2011. "Endogenous Market Structures and the Business Cycle," MPRA Paper 29629, University Library of Munich, Germany.
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  8. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  9. Federico Etro, 2004. "Innovation by leaders," Economic Journal, Royal Economic Society, vol. 114(495), pages 281-303, 04.
  10. Jan Boone & Delia Ionascu & Kresimir Zigic, 2006. "Trade Policy, Market Leaders and Endogenous Competition Intensity," CERGE-EI Working Papers wp311, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  11. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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  13. Mihir A. Desai & James R. Hines Jr., 2004. "Market Reactions to Export Subsidies," NBER Working Papers 10233, National Bureau of Economic Research, Inc.
  14. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  15. Horstmann, Ignatius J. & Markusen, James R., 1986. "Up the average cost curve: Inefficient entry and the new protectionism," Journal of International Economics, Elsevier, vol. 20(3-4), pages 225-247, May.
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Cited by:
  1. Federico Etro, 2010. "Endogenous market structures and antitrust policy," International Review of Economics, Springer, vol. 57(1), pages 9-45, March.
  2. Cato, Susumu & Matsumura, Toshihiro, 2013. "Merger and entry-license tax," Economics Letters, Elsevier, vol. 119(1), pages 11-13.
  3. Etro Federico, 2010. "Endogenous Market Structures and Contract Theory. Delegation, principal-agent contracts, screening, franchising and tying," Working Papers 2010_25, Department of Economics, University of Venice "Ca' Foscari".

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