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Endogenous Market Structures and Strategic Trade Policy

  • Federico Etro

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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.

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper149.pdf
File Function: First version, 2008
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 149.

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Length: 38 pages
Date of creation: Dec 2008
Date of revision: Dec 2008
Handle: RePEc:mib:wpaper:149
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  1. Fabio Ghironi & Marc Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," 2004 Meeting Papers 451, Society for Economic Dynamics.
  2. Rudiger Dornbusch, 1985. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
  3. colciago, andrea & Rossi, Lorenza, 2011. "Endogenous Market Structures and the Business Cycle," MPRA Paper 29629, University Library of Munich, Germany.
  4. Desai, Mihir A. & Hines Jr., James R., 2008. "Market reactions to export subsidies," Journal of International Economics, Elsevier, vol. 74(2), pages 459-474, March.
  5. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  6. Horstmann, Ignatius J. & Markusen, James R., 1986. "Up the average cost curve: Inefficient entry and the new protectionism," Journal of International Economics, Elsevier, vol. 20(3-4), pages 225-247, May.
  7. Jan Boone & Delia Ionascu & Kresimir Zigic, 2006. "Trade Policy, Market Leaders and Endogenous Competition Intensity," CERGE-EI Working Papers wp311, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  8. Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May.
  9. Krugman, Paul, 2008. "Increasing returns," Nobel Prize in Economics documents 2008-3, Nobel Prize Committee.
  10. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
  11. Venables, Anthony J., 1985. "Trade and trade policy with imperfect competition: The case of identical products and free entry," Journal of International Economics, Elsevier, vol. 19(1-2), pages 1-19, August.
  12. Charles Engel, 1999. "Local-Currency Pricing and the Choice of Exchange-Rate Regime," Working Papers 0036, University of Washington, Department of Economics.
  13. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  14. Federico Etro, 2004. "Innovation by leaders," Economic Journal, Royal Economic Society, vol. 114(495), pages 281-303, 04.
  15. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  16. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
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