Cost Asymmetry, Oligopolistic Competition, and Optimal Trade and Industrial Policies
Winston W. Chang
State University of New York at Buffalo - Department of Economics
Kansai University - Faculty of Economics
May 1, 2004
International Economic Journal, Vol. 19, No. 1, pp. 95-114, March 2005
Optimal trade and industrial policies are examined in an export-rivalry and a home-market model with general cost heterogeneity among firms. The roles of the demand and cost structures in policy determination are systematically analyzed. It is shown that the equal-markup property holds in both models under the firm-specific industrial policy. A more efficient firm has a higher subsidy or a lower tax rate than an inefficient one. In the home market model under free trade, the firm-specific industrial policy always calls for subsidies to all home firms. Under the firm-specific trade policy, it is shown that the difference between any two tariff rates exactly equals 100% of the difference between the foreign firms' marginal costs, the home industry is always granted some positive level of protection, and a production-tax-cum-import-subsidy policy is never optimal.
Number of Pages in PDF File: 20
Keywords: Cost Asymmetry, Trade and Industrial Policies
JEL Classification: F12, F13, L13
Date posted: January 9, 2011
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