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Endogenous Market Structures and Strategic Trade Policy

Author

Listed:
  • Federico Etro

Abstract

We characterize the optimal export promoting policies for international markets whose structure is endogenous. Contrary to the ambiguous results of strategic trade policy for markets with a fixed number of firms, it is always optimal to subsidize exports as long as entry is endogenous, under both competition in quantities and in prices. With homogenous goods the optimal export subsidy is a fraction 1/€ of the price, where € is the elasticity of demand, the exact opposite of the optimal export tax in the neoclassical trade theory. A similar argument can be applied to show the general optimality of R&D subsidies and of competitive devaluations to promote exports in foreign markets where entry is endogenous.

Suggested Citation

  • Federico Etro, 2008. "Endogenous Market Structures and Strategic Trade Policy," Working Papers 149, University of Milano-Bicocca, Department of Economics, revised Dec 2008.
    • Handle: RePEc:mib:wpaper:149
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    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
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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