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Conjectural Variations, Market Power, and Optimal Trade Policy in a Vertically Related Industry

15 Pages Posted: 29 Mar 2004  

Winston W. Chang

State University of New York at Buffalo - Department of Economics

Hajime Sugeta

Kansai University - Faculty of Economics

Abstract

The paper introduces the conjectural variations and bargaining approaches into a vertical model, wherein a foreign upstream firm supplies one input to two downstream firms that produce differentiated products for the export market. Various downstream firms' competition modes and upstream's pricing schemes emerge as special cases of this formulation. The authors show that the optimal export policy of a downstream country depends crucially on the downstream firms' conjectures of rivals' responses, the upstream firm's pricing schemes, their relative bargaining powers, and the degree of product differentiation. If the upstream's pricing or bargaining power is strong (weak) and if the downstream's degree of competition is high (low), a tax (subsidy) is optimal owing to a strong (weak) vertical profit-shifting effect and a weak (strong) horizontal effect.

Suggested Citation

Chang, Winston W. and Sugeta, Hajime, Conjectural Variations, Market Power, and Optimal Trade Policy in a Vertically Related Industry. Review of International Economics, Vol. 12, pp. 12-26, February 2004. Available at SSRN: https://ssrn.com/abstract=513987

Winston W. Chang (Contact Author)

State University of New York 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://economics.buffalo.edu/facultyprofiles/winston-chang/

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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