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Rivalry in Uncertain Export Markets: Commitment versus Flexibility

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Author Info
Dewit, Gerda
Leahy, Dermot

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Abstract

This Paper examines optimal trade policy in a two-period oligopoly model, with a home and a foreign firm choosing capital and output. Demand uncertainty, resolved in period two, gives rise to a trade-off between strategic commitment and flexibility in the firms’ investment decisions. When the government can commit to an export subsidy, it may choose to over- or under-subsidize to deter private-sector capital commitment. When the government chooses its trade policy flexibly, the relative value of commitment to the unsubsidized foreign firm is greater than to the subsidized home firm. Finally, a flexible subsidy regime is compared to free trade.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2771.

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Date of creation: Apr 2001
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Handle: RePEc:cpr:ceprdp:2771

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Related research
Keywords: Demand Uncertainty Flexibility Strategic Commitment Trade Policy

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February. [Downloadable!] (restricted)
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  2. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March. [Downloadable!] (restricted)
    Other versions:
  3. Goldberg, Pinelopi Koujianou, 1995. "Strategic Export Promotion in the Absence of Government Precommitment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 407-26, May. [Downloadable!] (restricted)
  4. Spencer, Barbara J & Brander, James A, 1983. "International R & D Rivalry and Industrial Strategy," Review of Economic Studies, Blackwell Publishing, vol. 50(4), pages 707-22, October. [Downloadable!] (restricted)
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  5. Karp, Larry S. & Perloff, Jeffrey M., 1995. "The failure of strategic industrial policies due to manipulation by firms," International Review of Economics & Finance, Elsevier, vol. 4(1), pages 1-16. [Downloadable!] (restricted)
  6. Neary, J Peter & Leahy, Dermot, 2000. "Strategic Trade and Industrial Policy towards Dynamic Oligopolies," Economic Journal, Royal Economic Society, vol. 110(463), pages 484-508, April. [Downloadable!] (restricted)
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  7. Neary, J. Peter, 1994. "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Elsevier, vol. 37(3-4), pages 197-218, November. [Downloadable!] (restricted)
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  8. Steve Dowrick, 1986. "von Stackelberg and Cournot Duopoly: Choosing Roles," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 251-260, Summer. [Downloadable!] (restricted)
  9. Neary, J Peter & O'Sullivan, Paul, 1999. " Beat 'Em or Join 'Em? Export Subsidies versus International Research Joint Ventures in Oligopolistic Markets," Scandinavian Journal of Economics, Blackwell Publishing, vol. 101(4), pages 577-96, December. [Downloadable!] (restricted)
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  10. Grossman, Gene & Maggi, Giovanni, 1998. "Free Trade Vs. Strategic Trade: A Peek into Pandora's Box," CEPR Discussion Papers 1784, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May. [Downloadable!] (restricted)
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  12. Gerda Dewit & Dermot Leahy, 2001. "Fighting over Uncertain Demand: Investment Commitment versus Flexibility," Economics, Finance and Accounting Department Working Paper Series n1060201, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
  13. Cooper, Russell & Riezman, Raymond, 1989. "Uncertainty and the Choice of Trade Policy in Oligopolistic Industrie s," Review of Economic Studies, Blackwell Publishing, vol. 56(1), pages 129-40, January. [Downloadable!] (restricted)
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  14. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-53, October. [Downloadable!] (restricted)
  15. James A. Brander, 1995. "Strategic Trade Policy," NBER Working Papers 5020, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Spencer, Barbara J. & Brander, James A., 1992. "Pre-commitment and flexibility : Applications to oligopoly theory," European Economic Review, Elsevier, vol. 36(8), pages 1601-1626, December. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gerda Dewit & Dermot Leahy, 2001. "Fighting over Uncertain Demand: Investment Commitment versus Flexibility," Economics, Finance and Accounting Department Working Paper Series n1060201, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
  2. Gerda Dewit & Dermot Leahy, 2004. "Short-run policy commitment when investment timing is endogenous: "More harm than good?"," Economics, Finance and Accounting Department Working Paper Series n1400904, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
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