Cost Asymmetry, Oligopolistic Competition, and Optimal Trade and Industrial Policies

International Economic Journal, Vol. 19, No. 1, pp. 95-114, March 2005

20 Pages Posted: 9 Jan 2011

See all articles by Winston W. Chang

Winston W. Chang

University at Buffalo - Department of Economics

Hajime Sugeta

Kansai University - Faculty of Economics

Date Written: May 1, 2004

Abstract

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.

Keywords: Cost Asymmetry, Trade and Industrial Policies

JEL Classification: F12, F13, L13

Suggested Citation

Chang, Winston W. and Sugeta, Hajime, Cost Asymmetry, Oligopolistic Competition, and Optimal Trade and Industrial Policies (May 1, 2004). International Economic Journal, Vol. 19, No. 1, pp. 95-114, March 2005, Available at SSRN: https://ssrn.com/abstract=1736763

Winston W. Chang (Contact Author)

University at Buffalo - Department of Economics ( email )

453 Fronczak Hall
Department of Economics, SUNY at Buffalo
Buffalo, NY 14260
United States
716-645-8671 (Phone)
716-645-2127 (Fax)

HOME PAGE: http://arts-sciences.buffalo.edu/economics/faculty/faculty-directory/chang.html

Hajime Sugeta

Kansai University - Faculty of Economics ( email )

3-3-35 Yamatecho
Suita, Osaka, 564-8680
Japan
81-6-6368-1121 (Phone)
81-6-6339-7704 (Fax)

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