Compatibility Standards and Strategic Trade Policy

35 Pages Posted: 2 May 2003

See all articles by Uwe Walz

Uwe Walz

Goethe University Frankfurt - Institute of Economics; Center For Financial Studies (CFS); Leibniz Institute for Financial Research SAFE

Bernd Woeckener

University of Tuebingen - Department of Economics

Date Written: March 2003

Abstract

We analyse the compatibility decisions of two national firms producing horizontally differentiated variants of a good that exhibits network effects for the world market. One of the firms is able to endogenously establish an installed base in its domestic market. The firm's effort in that respect is reinforced by a production subsidy that covers the firm's domestic market. With the help of a three-country model we ask under which circumstances this local subsidy may be and actually is used as a strategic trade-policy device. We show that the installed-base effect plays a role only when the firms opt for incompatibility. In addition, we obtain the result that only for intermediate values of the network-effect parameter incompatibility is chosen. In all other cases, compatibility emerges and so the local subsidy can be shown to increase world welfare.

Keywords: Compatibility decisions, strategic trade policy, standards

JEL Classification: F12, F13, L13

Suggested Citation

Walz, Uwe and Woeckener, Bernd, Compatibility Standards and Strategic Trade Policy (March 2003). Available at SSRN: https://ssrn.com/abstract=402780

Uwe Walz (Contact Author)

Goethe University Frankfurt - Institute of Economics ( email )

Postfach 81
D-60054 Frankfurt
Germany

Center For Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Bernd Woeckener

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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