Strategic Commercial Policy Revisited: A Supply Function Equilibrium Model
The author considers a model in which one firm in each of two countries produces a homogeneous good and sells it exclusively to a third country. Each firm simultaneously selects a supply function before a demand shock occurs. The model assumes that the home government can precommit to a subsidy function. The optimal marginal subsidy rate is shown to decrease with domestic exports. This induces the firms to select steeper supply functions, thereby softening competition. The strategic complementarity between supply functions' slopes is the key to these results. Copyright 1992 by American Economic Association.
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