Friday, September 18, 2009

A Brander & Spencer Style Strategic Trade Prisoner's Dilemma

From the Economist:
Elsewhere, the story points out that not a single manufacturer of any
significant size has gone under during the recession. There is a serious problem
here. No government wants its national champion (or champions) to be the one
that goes under, and so governments provide such support as is needed to pull
companies through tough periods.

Oligopoly, subsidies and trade. I question, however whether subsidies are the best strategic policy. If the nature of competition is Bertrand-style price competition, then export subsidies can improve domestic welfare (assuming no retaliation - heroic!). If the nature of competition is Cournot-style quantity competition, then tariffs and/or export taxes are appropriate in the absence of retaliation. Export taxes have the same proportional impact on relative prices as import tariffs; subsidies do the opposite, and worsen the terms of trade (price ratio of exports to imports) of the country offering them.

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