Fickle trade policy, productivity gaps, and market structure

Real-world cost asymmetries highlight the importance of firm heterogeneity. Studies focus on monopolistic competition owing to model tractability but overlook oligopoly settings. We analyze how the productivity gap between efficient and inefficient oligopolistic firms affects export policies within a standard third-market model. We show that a "subsidy-tax-subsidy" export policy pattern emerges depending on the degree of the productivity gap. Extending our model to multiple firms, we consider whether the gap in firm numbers affects export policies. We find that when this gap is large, one exporter may receive an export subsidy whereas the other faces an export tax.