Export market correlation and strategic trade policy

Abstract

In the traditional models of strategic trade policy pioneered by Brander and Spencer, exports of the domestic firm, engaged in a Cournot-Nash competition with the foreign firm in a neutral market, must be subsidized to maximize national welfare. We demonstrate that when the firms play the Cournot-Nash game in two stochastic and positively correlated markets, it may be optimal to tax exports to the more volatile market while subsidizing it in the other. The policy combination reduces the amplitude of aggregate profit and raises the utility of the risk-averse firm in a manner similar to the theory of portfolio choice. JEL Classification: F12, D18Marchés d'exportation co-reliés et politique commerciale stratégique. Dans les modèles traditionnels de politique commerciale stratégique proposés par Brander et Spencer, les exportations de la firme nationale, qui est engagée dans une concurrence à la Cournot-Nash avec une firme étrangère dans un marché neutre, doit être subventionnée si l'on veut maximiser le niveau national de bien-être. On montre que, quand les entreprises jouent un jeu à la Cournot-Nash dans deux marchés d'exportation stochastiques et positivement co-reliés, il peut être optimal de taxer les exportations vers le marché le plus volatile et de subventionner les exportations vers l'autre marché. Cette combinaison de politiques réduit l'amplitude de variation des profits agrégés et augmente l'utilité de l'entreprise qui a une aversion au risque d'une manière qui ressemble à ce qui se passe dans la théorie des choix de portefeuilles.

Price discrimination and social welfare with correlated demand

“…A similar formulation can also be found inBrown and Chiang (2002), andAnam and Chiang (1999).4 This result was first reported in the context of a single-market monopoly byLeland (1972).…”

Choice of trade policy for international oligopoly with incomplete information

“…This overly simplified assumption is not realistic for policymakers since they are unlikely to have full information about market conditions. In response to this concern, economists have been examining the effect of asymmetric information on strategic trade policy (see, for instance, Cooper and Riezman, 1989;Arvan, 1991;Shivakumar, 1993Shivakumar, , 1995Martimort, 1996, 1997;Grant and Quiggin, 1997;Maggi, 1999;Anam and Chiang, 2000;Caglayan, 2000;Caglayan and Usman, 2004;Creane and Miyagiwa, 2008;Antoniou and Tsakiris, 2014).…”

Two-part trade policy in the reciprocal market model

“…Important policy issues, such as export subsidies and countervailing duties, can be analyzed only through the "reciprocal markets" model. In [8], the strategic trade policy in independent markets was studied for the quadratic cost functions. The quadratic cost function has a significant effect on the export subsidy, and market correlation plays an important role in determining the Nash equilibrium when choosing the optimal policy regime.…”