Strategic Export Policy in Vertically Related Markets

Abstract

This paper analyses how strategic export policies are affected by introducing an imperfectly competitive intermediate good into a Bertrand duopoly model with product differentiation, where a home and a foreign final-good firm export to a third-country market. It is shown that when the home and foreign markets for the intermediate good are segmented, the optimal export policy towards the final good is a tax. In contrast, under integrated markets, the optimal export intervention is a subsidy. Whether bilateral export intervention is welfare improving compared with free trade, depends on the degree of product differentiation between the home and foreign final goods.

Optimal Export Policy With Upstream Price Competition

“…3). This corresponds to Kawabata's (2010) result, which is compatible with the specific combination of m = 1 and n = 2 in our model. Remark 3.…”

“…Because we assume a range of parameters where r ≤ r col , the input price each supplier selects must be equal to r, which provides the highest profit for suppliers in the set of Nash equilibria. 10 We also assume, as in many studies examining the effects of trade policies in vertical oligopoly models, that downstream firms are the price-takers of inputs (e.g., Bernhofen, 1995Bernhofen, , 1997Chou, 2011;Hwang et al, 2007;Ishikawa and Spencer, 1999;Kawabata 2010Kawabata , 2012Kawabata et al, 2010;Takauchi, 2010). However, this assumption is open to the criticism that downstream firms have market power in the final-good market, but no market power in the input market.…”

“…In the first stage, the Home government chooses s H to maximize (1). 14 We use Kawabata's (2010) decomposition to express the FOC for welfare maximization as follows:…”

“…Remark 3. (Kawabata, 2010) If m = 1 and n = 2, s C H > 0. Combining propositions 1 and 2, we establish the following proposition, the proof of which is given in Appendix A.…”

Cost Asymmetries and Industrial Policy in Vertically Related Markets*

“…The assumption that final-good firms take the price of the intermediate good as given is made in Bernhofen (1995Bernhofen ( , 1997, Ishikawa and Spencer (1999), Hwang et al (2007) and Kawabata (2010…”