No abstract

No abstract

This paper compares the social welfare effects of tariffs and quotas as strategic trade policy instruments in an oligopolistic industry where the domestic market demand is uncertain and the policy is chosen before the uncertainty is resolved. The uncertain demand, once realized, is assumed to be available only to the domestic firm when the output game is played between domestic and foreign firms. To highlight our assertion, a simple scenario with linear demand, additive stochastic market shock, homogeneous products, and identical constant marginal costs is considered. It is shown that a tariff is superior to a quota regardless of the degree of uncertainty. Moreover, we also show that a prohibitive quota that results in autarky is always preferred to a quota at the free-trade level.

This paper extends the conventional literature on strategic trade policy in reciprocal dumping model to the context that involves market demand uncertainty and incomplete information. In order to highlight the role of uncertainty and incomplete information, a simple scenario with linear asymmetric demand, additive stochastic market shock, homogeneous products, and identical constant marginal costs are considered. It is shown that incomplete information at industrial level redistributes the option value associated with better information to the country with the better informed firm. As a result, both governments tend to choose tariffs over export subsidies in the Nash equilibrium of the simultaneous strategic trade policy games under complete and incomplete information. This yields a second best outcome. Moreover, we show that Nash equilibrium outcome is inferior to free-trade outcome.

No abstract