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Market Structure and the Demand for Free Trade

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Author Info

  • Orlando I. Balboa

    (Grad Student at Vanderbilt University)

  • Andrew F. Daughety

    ()
    (Department of Economics and Law School, Vanderbilt University)

  • Jennifer F. Reinganum

    ()
    (Department of Economics and Law School, Vanderbilt University)

Abstract

We explore the interplay of market structure and government trade policy in the context of a heterogenous goods duopoly model (allowing for goods to be substitutes or complements) wherein governments simultaneously and noncooperatively choose whether or not to provide subsidies for their firms and then firms noncooperatively choose output levels, either sequentially (i.e., in a Stackelberg leader-follower model) or simultaneously (i.e., in a Cournot-Nash model). We focus on competition in quantities but also provide results when firms compete in prices. In both the quantity and price models we further allow for endogenous market structure by considering the case wherein one of the firms, a potential leader, can choose to lead or not lead (play Cournot). We find that government trade policy and market structure can interact. First, the trade regime can alter traditional firm preferences over sequential versus simultaneous play. Second, different market structures can influence governments' preferences about free trade versus subsidies. Further, if one of the firms is a potential leader, allowing for endogenous market structure generates equilibrium outcomes that sometime reinforce, and sometimes counter, received results in the extant strategic trade literature. For example, when firms compete in quantities, endogenous market structure results in Cournot-Nash competition, but competition in prices results in a leader-follower structure when the goods are substitutes, but a Cournot-Nash structure when the goods are complements.

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File URL: http://www.accessecon.com/pubs/VUECON/vu01-w12R.pdf
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0112.

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Date of creation: Jul 2001
Date of revision: Dec 2002
Handle: RePEc:van:wpaper:0112

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Market structure; strategic international trade;

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References

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Citations

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Cited by:
  1. Kojun Hamada, 2009. "Second-mover advantage under strategic subsidy policy in a third market model," Economics Bulletin, AccessEcon, vol. 29(1), pages 407-415.
  2. Miller, Nolan & Pazgal, Amit, 2002. "Strategic Trade and Delegated Competition," Working Paper Series rwp02-042, Harvard University, John F. Kennedy School of Government.
  3. Juan Carlos Bárcena-Ruiz, 2006. "Environmental Taxes and First-Mover Advantages," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 35(1), pages 19-39, September.
  4. Miller, Nolan H. & Pazgal, Amit, 2005. "Strategic trade and delegated competition," Journal of International Economics, Elsevier, vol. 66(1), pages 215-231, May.
  5. Yue, Xiaohang & Mukhopadhyay, Samar K. & Zhu, Xiaowei, 2006. "A Bertrand model of pricing of complementary goods under information asymmetry," Journal of Business Research, Elsevier, vol. 59(10-11), pages 1182-1192, October.
  6. Fethke, Gary, 2005. "Strategic determination of higher education subsidies and tuitions," Economics of Education Review, Elsevier, vol. 24(5), pages 601-609, October.
  7. Yoad Shefi & Asher Tishler, 2005. "The Effects Of The World Defense Industry And Us Military Aid To Israel On The Israeli Defense Industry: A Differentiated Products Model," Defence and Peace Economics, Taylor & Francis Journals, vol. 16(6), pages 427-448.
  8. Benny Mantin & Asher Tishler, 2004. "The structure of the defense industry and the security needs of the country: a differentiated products model," Defence and Peace Economics, Taylor & Francis Journals, vol. 15(5), pages 397-419.

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