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Cost asymmetry, oligopolistic competition and optimal trade and industrial policies

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  • Winston Chang
  • Hajime Sugeta

Abstract

Optimal trade and industrial policies are examined in an export-rivalry and a home-market model with general cost heterogeneity among firms. The roles of the demand and cost structures in policy determination are systematically analysed. It is shown that the equal-markup property holds in both models under the firm-specific industrial policy. A more efficient firm has a higher subsidy or a lower tax rate than an inefficient one. In the home market model under free trade, the firm-specific industrial policy always calls for subsidies to all home firms. Under the firm-specific trade policy, it is shown that the difference between any two tariff rates exactly equals 100% of the difference between the foreign firms' marginal costs, the home industry is always granted some positive level of protection, and a production-tax-cum-import-subsidy policy is never optimal.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 19 (2005)
Issue (Month): 1 ()
Pages: 95-114

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Handle: RePEc:taf:intecj:v:19:y:2005:i:1:p:95-114

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Keywords: Cost asymmetry; trade and industrial policies;

References

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  1. Ngo, Van Long & Soubeyran, Antoine, 1997. "Cost heterogeneity, industry concentration and strategic trade policies," Journal of International Economics, Elsevier, vol. 43(1-2), pages 207-220, August.
  2. Collie, David, 1993. "Strategic trade policy under asymmetric oligopoly," European Journal of Political Economy, Elsevier, vol. 9(2), pages 275-280, May.
  3. Kala Krishna & Marie Thursby, 1988. "Optimal Policies with Strategic Distortions," NBER Working Papers 2527, National Bureau of Economic Research, Inc.
  4. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  5. Collie, David & de Meza, David, 2003. "Comparative advantage and the pursuit of strategic trade policy," Economics Letters, Elsevier, vol. 81(2), pages 279-283, November.
  6. Bandyopadhyay, Subhayu, 1997. "Demand elasticities, asymmetry and strategic trade policy," Journal of International Economics, Elsevier, vol. 42(1-2), pages 167-177, February.
  7. Leahy, Dermot & Montagna, Catia, 2001. "Strategic Trade Policy with Heterogeneous Costs," Bulletin of Economic Research, Wiley Blackwell, vol. 53(3), pages 177-82, July.
  8. Collie, D., 1990. "Export Subsidies And Countervailing Tariffs," The Warwick Economics Research Paper Series (TWERPS) 353, University of Warwick, Department of Economics.
  9. Van Long, N. & Soubeyran, A., 1996. "Industry Structure and Optimal Discriminatory Commercial Policies," G.R.E.Q.A.M. 96a38, Universite Aix-Marseille III.
  10. Sajal Lahiri & Yoshiyasu Ono, 1997. "Asymmetric oligopoly, international trade, and welfare: a synthesis," Journal of Economics, Springer, vol. 65(3), pages 291-310, October.
  11. Brander, James A. & Spencer, Barbara J., 1984. "Trade warfare: Tariffs and cartels," Journal of International Economics, Elsevier, vol. 16(3-4), pages 227-242, May.
  12. Ngo Van Long & Antoine Soubeyran, 1999. "Industry concentration and optimal discriminatory commercial policies," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 8(3), pages 241-256.
  13. Collie, David & De Meza, David, 1986. "Inadequacies of the strategic rationale of export subsidies," Economics Letters, Elsevier, vol. 22(4), pages 369-373.
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