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Endogenous Market Structures and International Trade. II: Optimal Trade Policy

  • Federico Etro

    ()

    (Department of Economics, University Of Venice C� Foscari)

I characterize the optimal unilateral trade policy for domestic firms competing in domestic or integrated markets with endogenous entry of foreign firms. Under conditions satisfied in most trade models (as with quasi-linear or Dixit-Stiglitz preferences), the analysis is simplified by a Neutrality Theorem: any policy affecting the profitability of the domestic firm is not going to affect consumers surplus and the strategies of the foreign firms, but changes their number and the profits of the domestic firm. In a domestic market with quantity competition the optimal tariff is positive with linear demand but negative with highly convex demand or Dixit-Stiglitz preferences. In an integrated market the optimal subsidy to domestic production is always positive, independent from the relative size of the domestic market and inversely related to the elasticity of demand.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2012/WP_DSE_etro_32_12.pdf
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Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2012:32.

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Length: 36
Date of creation: 2012
Date of revision:
Handle: RePEc:ven:wpaper:2012:32
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  2. Aditya Bhattacharjea, 2001. "Foreign entry and domestic welfare: lessons for developing countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 11(2), pages 143-162.
  3. Federico Etro, 2008. "Endogenous Market Structures and Strategic Trade Policy," Working Papers 149, University of Milano-Bicocca, Department of Economics, revised Dec 2008.
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  10. Venables, Anthony J, 1987. "Trade and Trade Policy with Differentiated Products: A Chamberlinian-Ricardian Model," Economic Journal, Royal Economic Society, vol. 97(387), pages 700-717, September.
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  14. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
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  19. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model," Journal of International Economics, Elsevier, vol. 89(1), pages 13-25.
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  22. Hiroaki Ino & Toshihiro Matsumura, 2009. "How Many Firms Should Be Leaders? Beneficial Concentration Revisited," Discussion Paper Series 48, School of Economics, Kwansei Gakuin University, revised Oct 2009.
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  25. Gros, Daniel, 1987. "A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade," Journal of International Economics, Elsevier, vol. 23(3-4), pages 357-367, November.
  26. Federico Etro, 2012. "Endogenous Market Structures and International Trade. I: Theory," Working Papers 2012:31, Department of Economics, University of Venice "Ca' Foscari".
  27. Markusen, James R. & Venables, Anthony J., 1988. "Trade policy with increasing returns and imperfect competition : Contradictory results from competing assumptions," Journal of International Economics, Elsevier, vol. 24(3-4), pages 299-316, May.
  28. Peretto, Pietro F., 2000. "Endogenous market structure and the growth and welfare effects of economic integration," Working Papers 00-14, Duke University, Department of Economics.
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