We use a model of sequentialduop oly to examine the effect of verticalo wnership structure on firms’ outputs and profit shares in the internationalmark et for raw and processed tropicaltim ber products. The modelpro vides insights that can be applied to the Indonesian logging and plywood industry; shedding light on the appropriate policy responses. We find that when industries are integrated, the government should subsidise both exports. Thus, despite log and plywood being strategic substitutes, log export barriers make Indonesia worse off. When industries are separated, however, plywood exports should be subsidised but the optimal trade policy on log exports depends on two effects. If the commitment failure effect (as in Brander and Spencer (1985)) dominates then log exports should be subsidised, however, if the negative cross-industry effect dominates then log exports should be taxed.
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Find related papers by JEL classification: F19 - International Economics - - Trade - - - Other D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure L73 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Forest Products
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