Targeted Export Promotion with Several Oligopolistic Industries

22 Pages Posted: 8 Mar 2007 Last revised: 5 Sep 2010

See all articles by Avinash Dixit

Avinash Dixit

Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Gene M. Grossman

Princeton University - Princeton School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: April 1984

Abstract

In this paper we ask whether a policy of targeted export promotion can raise domestic welfare when several oligopolistic industries all draw on the same scarce factor of production. Our point of departure is one of Cournot duopoly in which a single home firm competes with a single foreign firm in a market outside the horse country. It has been shown previously that when there is only one such industry in an otherwise perfectly competitive world economy, a subsidy policy by the home government transfers profits to the domestic firm, and thereby raises domestic welfare. However,when many such industries (and only these) utilize the same inelastically supplied resource, promotion of one bids up the return to the specific factor, and consequently disadvantages all of the non-targeted industries in their respective duopolistic competitions. Our question then is which industry(s), if any, is worthy of promotion. We find that, when the specific factor is used in fixed proportion to output, and all of the duopolies have similar demand and cost conditions, a policy of free trade is optimal. We identify the conditions for welfare improvement when a single industry is selected for targeting under asymmetric conditions, and also investigate whether a uniform subsidy to all industries in the imperfectly competitive sector will raise domestic welfare.

Suggested Citation

Dixit, Avinash K. and Grossman, Gene M., Targeted Export Promotion with Several Oligopolistic Industries (April 1984). NBER Working Paper No. w1344, Available at SSRN: https://ssrn.com/abstract=969307

Avinash K. Dixit (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
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CESifo (Center for Economic Studies and Ifo Institute)

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Gene M. Grossman

Princeton University - Princeton School of Public and International Affairs ( email )

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Princeton, NJ 08544-1021
United States
609-258-4823 (Phone)
609-258-1374 (Fax)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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