Dominant Strategic Trade Policy

Abstract

In implementing trade policy measures, governments usually select from a range of instruments including quotas, subsidies (explicit or implicit) and tariffs. In this paper we consider the potential gain of a government pursuing a two-part trade policy: an import license for entry, along with a per-unit tariff on imports. The model is a three-step game between home and foreign countries in the Cournot duopoly. The paper demonstrates that two-part trade policy is dominant.

Two-part trade policy in the reciprocal market model

“…In this game for the homogeneous case, [10] found that import tariffs of the two-part trade policy reduce the level of domestic outputs of foreign firms and increase the level of domestic outputs of domestic firms.…”