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Strategic Trade Policy in Reciprocal Dumping Model with Incomplete Information

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  • Ning, Haokai

Abstract

This paper extends the conventional literature on strategic trade policy in reciprocal dumping model to the context that involves market demand uncertainty and incomplete information. In order to highlight the role of uncertainty and incomplete information, a simple scenario with linear asymmetric demand, additive stochastic market shock, homogeneous products, and identical constant marginal costs are considered. It is shown that incomplete information at industrial level redistributes the option value associated with better information to the country with the better informed firm. As a result, both governments tend to choose tariffs over export subsidies in the Nash equilibrium of the simultaneous strategic trade policy games under complete and incomplete information. This yields a second best outcome. Moreover, we show that Nash equilibrium outcome is inferior to free-trade outcome.

Suggested Citation

  • Ning, Haokai, 2020. "Strategic Trade Policy in Reciprocal Dumping Model with Incomplete Information," MPRA Paper 101530, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:101530
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    References listed on IDEAS

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    1. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
    2. Shivakumar, Ram, 1993. "Strategic trade policy : Choosing between export subsidies and export quotas under uncertainty," Journal of International Economics, Elsevier, vol. 35(1-2), pages 169-183, August.
    3. Ning, Haokai, 2020. "On the Equivalence of Tariffs and Quotas with Incomplete Information," MPRA Paper 101512, University Library of Munich, Germany.
    4. Ning, Haokai, 2020. "Choice of Trade Policy with Incomplete Information," MPRA Paper 101529, University Library of Munich, Germany.
    5. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
    6. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
    7. Caglayan, Mustafa, 2000. "Uncertainty Resolution and Strategic Trade Policy in Oligopolistic Industries," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 311-318, May.
    8. Russell Cooper & Raymond Riezman, 2013. "Uncertainty and the Choice of Trade Policy in Oligopolistic Industries," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 16, pages 287-298, World Scientific Publishing Co. Pte. Ltd..
    9. Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455, Elsevier.
    10. Mustafa Caglayan, 2000. "Uncertainty Resolution and Strategic Trade Policy in Oligopolistic Industries," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 311-318, May.
    11. Hung-Yi Chen & Hong Hwang, 2006. "Tariffs versus Quotas under Market Price Uncertainty," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 142(1), pages 181-194, April.
    12. Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, vol. 52(4), pages 1029-1050, July.
    13. 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.
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    Cited by:

    1. Ning, Haokai, 2020. "On the Equivalence of Tariffs and Quotas with Incomplete Information," MPRA Paper 101512, University Library of Munich, Germany.
    2. Ning, Haokai, 2020. "Choice of Trade Policy with Incomplete Information," MPRA Paper 101529, University Library of Munich, Germany.

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    More about this item

    Keywords

    Intra-industry Trade; Incomplete Information; Uncertainty; Bayesian Nash equilibrium; Tariff; Export subsidy;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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