Endogenous timing, strategic tariff game and bilateral trade in vertical oligopoly

Abstract

This paper builds an observable delay game in endogenous timing to study the possible occurrence of trade wars in a vertical, bilateral trade model. It examines the effects of production cost differences and order of moves on optimal tariffs, market equilibria, dumping margin and social welfare in both fixed timing and endogenous timing games. In a fixed timing game, it shows that price dumping in the intermediate good market arises from differences in country-specific final good production costs. Different from Bernhofen (1995; Journal of International Economics), trade costs resulting from reciprocal tariffs in upstream markets can reverse the price dumping under certain conditions. In an endogenous timing game, this paper finds that the magnitude of cost differences significantly influences countries' decisions on the order of moves in a strategic tariff-making game. Both countries want to be the first movers under a small cost difference and consequently reach a simultaneous equilibrium result. This demonstrates that the second-best equilibrium proceeds under certain conditions. Under a large cost difference, sequential policy-making is the subgame perfect Nash equilibrium. If the cost difference is sufficiently large, both countries have an incentive to launch a trade war as a multiple equilibrium game.* We are indebted to the editor, Professor David Cook, and two anonymous referees for constructive comments and helpful suggestions.

Modelling trade war between two countries under the international division of Labour

“…Sun, Luo, and Zhou (2022) [ 42 ] developed theoretical and empirical models to examine whether regional trade agreements could improve the quality of exported products amid uncertainties from the trade war. Chen and Kuang (2023) [ 15 ] formulated a theoretical game within an endogenous time series, investigating potential trade wars in a vertical bilateral trade model. Although our theoretical model closely aligns with theirs, crucial disparities define our research from that of Chen and Kuang (2023) [ 15 ].…”

“…Chen and Kuang (2023) [ 15 ] formulated a theoretical game within an endogenous time series, investigating potential trade wars in a vertical bilateral trade model. Although our theoretical model closely aligns with theirs, crucial disparities define our research from that of Chen and Kuang (2023) [ 15 ]. The primary distinctions encompass: (1) Our study delves into the industrial structure of the international division of intermediate goods, whereas the latter does not.…”

“…The objective basis supporting the construction of the series of mathematical models is similar to that of Chen and Kuang (2023) [ 15 ]. The subsequent mathematical model will be lucidly articulated, precisely defined, and rigorously expounded.…”

“…Chen and Kuang (2023) [ 15 ] used a theoretical model to scrutinize trade wars, establishing a trading game within an endogenous time series framework to explore potential trade wars in a vertical bilateral trade model. Within a fixed-time game scenario, their analysis revealed that the pricing disparity in intermediate goods stems from variations in the production costs of final goods.…”