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Strategic Trade Policy under Integrated Markets

Author

Listed:
  • Hviid, Morten

    () (University of Warwick)

  • R. Collie, David

    (Cardiff University)

Abstract

A model of strategic trade policy under integrated markets is presented and optimal trade policies are derived under assumptions of both complete and incomplete information. With the assumption of complete information it is shown that the optimal policy is an import tariff (export subsidy) when a coun - try is a net importer (exporter). In the Nash equilibrium in trade policies the low cost country gives an export subsidy which is fully countervailed by the import tariff of the other country. The introduction of incomplete information about costs adds an incentive for both governments to use their trade policy as a signal of their firm’s costs. This signalling effect increases the export subsidy and decreases the import tariff. In the simultaneous signalling game, with symme - try, the expected welfare in the separating equilibrium is higher than under free trade for both countries.

Suggested Citation

  • Hviid, Morten & R. Collie, David, 1999. "Strategic Trade Policy under Integrated Markets," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 14, pages 522-553.
  • Handle: RePEc:ris:integr:0116
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    References listed on IDEAS

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    Cited by:

    1. Collie, David R., 1998. "Trade policy under Bertrand duopoly with integrated markets: the pure strategy equilibrium," Economics Letters, Elsevier, vol. 60(2), pages 179-183, August.
    2. Keith Head & Barbara J. Spencer, 2017. "Oligopoly in International Trade: Rise, Fall and Resurgence," NBER Working Papers 23720, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    integrated markets; incomplete information; signalling; subsidies; tariffs;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • 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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