Dynamic duopoly with output adjustment costs in international markets: taking the conjecture out of conjectural variations (original) (raw)

Conjectural Variations, Market Power, and Optimal Trade Policy in a Vertically Related Industry

Review of International Economics, 2004

The paper introduces the conjectural variations and bargaining approaches into a vertical model wherein a foreign upstream firm supplies one input to two downstream firms that produce differentiated products for the export market. Various downstream firms' competition modes and upstream's pricing schemes emerge as special cases of this formulation. The authors show that the optimal export policy of a downstream country depends crucially on the downstream firms' conjectures of rivals' responses, the upstream firm's pricing schemes, their relative bargaining powers, and the degree of product differentiation. If the upstream's pricing or bargaining power is strong (weak) and if the downstream's degree of competition is high (low), a tax (subsidy) is optimal owing to a strong (weak) vertical profit-shifting effect and a weak (strong) horizontal effect.

The Gains from Trade with Monopolistic Competition: Specification, Estimation, and Mis-Specification

2002

The difficulty of incorporating general equilibrium price effects into econometric estimating equations has deterred most researchers from econometrically estimating the welfare gains from trade liberalization. Using a paired-down CES monopolistic competition example, we show that this difficulty has been greatly exaggerated. Along the way, we estimate -indeed precisely estimatelarge welfare gains from trade liberalization as measured by compensating variation.

Optimal Trade and Industrial Policy under Oligopoly

The Quarterly Journal of Economics, 1986

In this paper we provide an integrative treatment of the welfare effects of trade and industrial policy under oligopoly, and characterize qualitatively the form that optimal intervention takes under a variety of assumptions about the number of firms, their conjectures about the response of their rivals to their actions, the substitutability of their products and the markets in which they are sold. We find that when no domestic consumption occurs optimal policy under duopoly with a single home firm depends on the difference between firms' actual responses to their rivals and the response that their rivals' conjecture. If conjectures are consistent , free trade is optimal. A tax or subsidy is indicated depending on the sign of the difference between the conjectured and the actual reponse. With more than one home firm but still no domestic consumption, an export tax is indicated if conjectures are consistent. Production subsidies and export tax-cum-subsidjes can raise national welfare in the presence of domestic consumption, because these policies can mitigate the extent of the consumption distortion implicit in the deviation of price from marginal cost.

Trade policy with increasing returns and imperfect competition

Journal of International Economics, 1988

A number of etQcIIt under d&rent derive d&rent results about the ekts of trade and industrial the number of firms is fixed than when there is frse entry. 1. lo positive or normative implications of these twin ass papers produce a bewildering 'model' in the sense we An example of this can cost, then there 1s a 0022-1996/88/S3,50 0 1988, Elsevier §ciencze Publishers B.V. (North-J.R. Mmkusen and A.J. Venubks, Tmde @icy Peru by Horstmann and Markusen (1986) and Venables (1685) demonstrate the role of export subsidies then depends crucially on whether intemational markets are segmented or integrated. In the former case firms can set es in domestic and forei e p&& of a pi&duct twa countries so as to equalize product prices in model from which to ng the industry structure an market structure aim is to *use the model to generate comparisons the literature. In addition, we obtain some new markets, and con-In order to accomphsh this purpose in a relatively transparent way, we in other directions. We have done this with a following assumptions: (a) demand curves are and subsidies are consideted; (c) marginal costs t; and (d) conjectures are Coumot. While many of the aboveassumptions in any c8se, it is nevertheless true the four models are not robust with respect to any rest&s cao, for example, turn on Coumot [Eaton and Grossman (1986)]. But s to offer a meaningful comparison of model% not any single case. We thus feel that '&e sacrifice of y is worthwhile, but urge those not familiat with the literature to ky implications of any particular model may not be X=n,x and X+=ngF, etc. n,x=X=ll(a-p,--P,,h nyy= Y=l(a-q-qPy-PJl9 aud fore@ demands arc n# = X* = l*(apz -b(pz -P:l}, n,p = Y*=f+(a-p:-bfp:-pz)}.

Optimal Trade Policy with Monopolistic Competition and Heterogeneous Firms

SSRN Electronic Journal, 2000

This paper derives optimal trade and domestic taxes for a small open economy containing a monopolistically competitive (MC) sector in which firms may have heterogeneous productivity levels. Analysis encompasses cases in which the domestic MC sector is able to expand or contract flexibly, or is constrained to be of fixed size. In the former case domestic protection can bring gains by increasing the number of product varieties on offer; these gains (and the corresponding rates of domestic subsidy or of import tariffs) are reduced by heterogeneity of foreign exporters some of whom may withdraw from the market. In the latter case gains from protection arise from terms-of-trade effects; since various margins of substitution are switched off, only the relative values of domestic taxes, import tariffs and export taxes matter. In general, policies work through both a terms-oftrade and a variety effect, and the paper shows how the relative importance of each depends on the structure of the economy.

Strategic tariffs, tariff jumping, and heterogeneous firms

European Economic Review, 2011

The majority of research to date investigating strategic tariffs in the presence of multinationals finds a knife-edge result where, in equilibrium, all foreign firms are either multinationals or exporters. Utilizing a model of heterogeneous firms, we find equilibria in which both pure exporters and multinationals coexist. We utilize this model to study the case of endogenously chosen tariffs. As is standard, Nash equilibrium tariffs are higher than the socially optimal tariffs. Unlike existing models with homogeneous firms, we find that non-cooperative tariffs promote the existence of low-productivity firms relative to the socially optimal tariffs. This highlights a new source of inefficiency from tariff competition not found in models of homogeneous firms. In addition, we find that in many cases the Nash equilibrium tariff when FDI is a potential firm structure is lower than when it is not. As a result, FDI improves welfare by mitigating tariff competition. (M.T. Cole). 1 find that the threat of protection had a substantial positive effect on greenfield FDI in the U.S. in the 1980s. Similarly, investigate the effect of FDI on U.S. legislators' votes on protectionist policies between 1985 and 1994 and finds that quid pro quo FDI has an effect, but not in a systematic way. For instance, legislators who were initially more protectionist in nature tended to increase trade restrictions, where legislators who took a more free trade stance were inclined to lower trade restrictions.

Monopolistic competition and international trade theory

2000

Almost twenty-five years after the appearance of Dixit and Stiglitz's paper on monopolistic competition and optimum product diversity, I try to take stock of the progress which has been made in applying their approach to international trade theory. I review the principal applications to trade theory and present a new one: by embedding DS preferences in a specific-factors framework, I sketch a model which shows how multinational corporations can emerge even between countries with similar factor endowments. Finally, I address some limitations of the approach, including its treatment of variety, returns to scale, entry and firms' strategies.