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Strategic trade and industrial policy towards dynamic oligopolies

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  • J. Peter Neary
  • Dermot Leahy

Abstract

In this paper characterise optimal trade and industrial policy in dynamic oligopolistic markets. If governments can commit to future policies, optimal first-period intervention should diverge from the profit-shifting benchmark to an extent which exactly offsets the strategic behaviour implied by Fudenberg and Tirole''s "fat cats and top dogs" taxonomy of business strategies. Without government commitment, there is an additional basis for intervention, whose sign depends on the strategic substitutability between future policy and current actions. We consider a variety of applications (to R&D spillovers, consumer switching costs, etc.) and extensions to second-best, revenue-constrained and entry-promotion policies.

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File URL: http://eprints.lse.ac.uk/20246/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 20246.

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Length: 40 pages
Date of creation: Nov 1998
Date of revision:
Handle: RePEc:ehl:lserod:20246

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Web page: http://www.lse.ac.uk/
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Related research

Keywords: Learning by Doing; R&D Subsidies; Strategic Trade Policy; Export Subsidies; Commitment; Dynamic Consistency;

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References

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  1. To, T., 1993. "Export subsidies and oligopoly with switching costs," Discussion Paper 1993-40, Tilburg University, Center for Economic Research.
  2. James A. Brander, 1995. "Strategic Trade Policy," NBER Working Papers 5020, National Bureau of Economic Research, Inc.
  3. 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.
  4. Leahy, Dermot & Neary, J Peter, 1996. "International R&D Rivalry and Industrial Strategy without Government Commitment," Review of International Economics, Wiley Blackwell, vol. 4(3), pages 322-38, October.
  5. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  6. Leahy, Dermot & Neary, J Peter, 1995. "Public Policy Towards R&D in Oligopolistic Industries," CEPR Discussion Papers 1243, C.E.P.R. Discussion Papers.
  7. Kyle Bagwell & Robert W. Staiger, 1989. "The Sensitivity of Strategic and Corrective R&D Policy in Oligopolistic Industries," Discussion Papers 869, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Avinash K. Dixit & Gene M. Grossman, 1987. "Targeted Export Promotion with Several Oligopolistic Industries," NBER Working Papers 1344, National Bureau of Economic Research, Inc.
  9. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-37, December.
  10. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
  11. 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.
  12. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  13. D Leahy & J.P. Neary, 1995. "Learning by Doing," CEP Discussion Papers dp0251, Centre for Economic Performance, LSE.
  14. A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring.
  15. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  16. D Leahy & J.P. Neary, 1997. "R&D Spillovers and the Case for Industrial Policy in an Open Economy," CEP Discussion Papers dp0345, Centre for Economic Performance, LSE.
  17. Carmichael, Calum M., 1987. "The control of export credit subsidies and its welfare consequences," Journal of International Economics, Elsevier, vol. 23(1-2), pages 1-19, August.
  18. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  19. 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.
  20. Neary, J Peter, 1989. "Export Subsidies and Price Competition," CEPR Discussion Papers 327, C.E.P.R. Discussion Papers.
  21. Leahy, Dermot & Neary, J Peter, 1999. "Learning by Doing, Precommitment and Infant-Industry Promotion," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 447-74, April.
  22. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March.
  23. Gruenspecht, Howard K., 1988. "Export subsidies for differentiated products," Journal of International Economics, Elsevier, vol. 24(3-4), pages 331-344, May.
  24. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
  25. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May.
  26. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
  27. Neary, J Peter, 1989. "Trade Liberalization and Shadow Prices in the Presence of Tariffs and Quotas," CEPR Discussion Papers 345, C.E.P.R. Discussion Papers.
  28. Vives, Xavier, 1989. "Technological competition, uncertainty, and oligopoly," Journal of Economic Theory, Elsevier, vol. 48(2), pages 386-415, August.
  29. Barbara J. Spencer & James A. Brander, 1983. "International R&D Rivalry and Industrial Strategy," NBER Working Papers 1192, National Bureau of Economic Research, Inc.
  30. Drew Fudenberg & Jean Tirole, 1983. "Learning-by-Doing and Market Performance," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 522-530, Autumn.
  31. David de Meza, 1986. "Export Subsidies and High Productivity: Cause or Effect?," Canadian Journal of Economics, Canadian Economics Association, vol. 19(2), pages 347-50, May.
  32. Maskin, Eric S & Newbery, David M, 1990. "Disadvantageous Oil Tariffs and Dynamic Consistency," American Economic Review, American Economic Association, vol. 80(1), pages 143-56, March.
  33. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-21, January.
  34. 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.
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