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Strategic Trade Policy with Endogenous Product Differentiation

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  • Andreas Hoefele

Abstract

In this paper I develop a model of international duopoly, where firms invest in product differentiation. I show that firms have an incentive to free-ride on the investment of their rival, due to an externality generated by product differentiation. A further effect of product differentiation is the market-expansion effect, which induces consumers to increase their aggregate spending in the market. Depending on the strength of the two effects, the investments are either strategic substitutes or strategic complements. I link this result to strategic trade policy and show that the optimal policy depends on the strength of the market-expansion effect.

Suggested Citation

  • Andreas Hoefele, 2010. "Strategic Trade Policy with Endogenous Product Differentiation," Discussion Papers 10/23, University of Nottingham, GEP.
    • Handle: RePEc:not:notgep:10/23
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    File URL: https://www.nottingham.ac.uk/gep/documents/papers/2010/10-23.pdf
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