INSTITUTE OF DEVELOPING ECONOMIES IDE Discussion Papers are preliminary materials circulated to stimulate discussions and critical comments Abstract IDE DISCUSSION PAPER No. 287 Strategic Trade Policy and Non-Linear Subsidy -In The Case of Price Competition- Hisao Yoshino* March 2011 In a strategic trade policy, it is assumed, in this paper, that a govement changes its disbursement or levy method so that the reaction function of a home fi approaches infinitely close to that of a foreign firm. In the framework of the Bel1rand-Nash equilibrium, Eaton and Grossman[ 1986] showed that an export tax is preferable to an export subsidy. In th is paper, it is shown that an export subsidy is preferable to an export tax in some cases in the framework of the Bertra nd-Nash equilibrium, considering the uncertainty in demand. Historically, many economists have mentioned a non-linear subsidy or tax. However, optimum solution to this has not yet been shown, and so the optimum solution is shown in this paper. Keords: strategic trade policy, non-linear subsidy, Bertrand-Nash equilibrium, Stackelberg equilibri JEL classification: F12, F13, L52, en * Inteational Economics Studies Group, Development Studies Center, IDE (yosino@ide.go.jp)
19
Embed
INSTITUTE OF DEVELOPING ECONOMIES · INSTITUTE OF DEVELOPING ECONOMIES IDE Discussion Papers are preliminary materials circulated ... Stackelberg equilibrium JEL classification: F12,
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
INSTITUTE OF DEVELOPING ECONOMIES
IDE Discussion Papers are preliminary materials circulated to stimulate discussions and critical comments
Abstract
IDE DISCUSSION PAPER No. 287
Strategic Trade Policy and Non-Linear Subsidy
-In The Case of Price Competition-
Hisao Yoshino*
March 2011
In a strategic trade policy, it is assumed, in this paper, that a government changes its
disbursement or levy method so that the reaction function of a home firm approaches infinitely
close to that of a foreign firm. In the framework of the Bel1rand-Nash equilibrium, Eaton and
Grossman[ 1986] showed that an export tax is preferable to an export subsidy. In th is paper, it is
shown that an export subsidy is preferable to an export tax in some cases in the framework of
the Bertrand-Nash equilibrium, considering the uncertainty in demand. Historically, many
economists have mentioned a non-linear subsidy or tax. However, optimum solution to this has
not yet been shown, and so the optimum solution is shown in this paper.
When point P approaches point A and point Q approaches point B,
p � a, q � b, the x component of intersect ion approaches
3 a
In a similar manner, the limit of the y component of intersection can be obtained. As a
result, the l imit of intersection should be as follows.
12
REFERENCES
Anam M. and S. Chiang, 2000, "ExpOlt Market Correlation and Strategic Trade Policy", The Canadian Journal of Economics, Vo\. 33, No. 1,41-52. Brander J.A. and BJ. Spencer, 1985, "Export Subsidies and Market share Rivarly", Journal of International Economics, Vo!.18. Brander , J. and P. Krugman, 1983, "A 'reciprocal dumping' model of international trade," Journal of International Economics 15:313-321. Bulow, J. I., J. D. Geanakoplos, and P.D. Klemperer, 1985, "Multimarket Oligopoly : Strategic Substitutes and Complements", Journal of Political Economy, 93 : 488-51 \. Collie, D.,1994, "Strategic Trade Policy and Retal iation." Japan and the World Economy, 6. Cooper R. and R. Riezman, 1989, "Unceltainty and the Choice of Trade Policy in
Oligopolistic Industries", The Review of Economic Studies, Vol 56, No.l, 129-140. Eaton, J. and G.M.Grossman, 1986, "Optimal Trade and Industry Policy under Oligopoly", Quarterly Journal of Economics, Vo!. 101,85-100. Friedman, J. W., 1977, Oligopoly and the Theory of Games, Amsterdam: North-Holland. Friedman, J. W., 1986, Game Theory with Applications to Economics, New York,
Oxford: Oxford Univ. Press. Fudenberg, D. and J. Tirole, 1984, "The Fact-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look", American Economic Review : Papers and Proceedings, 74 :361-66. Fudenberg, D. and J. Tirole, 1986, Dynamic Models ofOligopoly, Harwood Academic Publishers. Helpman, E. (1992) "Endogenous Macroeconomic Growth Theory," European Economic Review, Vo\. 36, pp.237-267. Helpman, E.; Krugman, P., 1989(1992), Trade Policy and Market Structure,Cambridge(Mass.): MIT Press. P. R.Krugman and M. Obsfeld, International Economic Theory and Policy, Scott, Foresman and Company, 1988. Krugman, Paul R. 1984. "lmpOlt protection as export promotion" In K. Kierrzkowski, ed., Monopolistic Competition and International Trade. Oxford: Oxford University Press. Klempere P. and M. Meyer, 1986, "Price Competition vs. Quantity Competition: The Role of Uncertainty", The Rand Journal of Economics, Vo!. 17, NoA, 618-638. Klempere P. and M. Meyer, 1989, "Supply Function Equilibria in Oligopoly under Uncertainty", Econometrica, Vo!. 57, No.6, 1243-1277. Laussel D., 1992, "Strategic Commercial Policy Revisited: A Supply-Function Equilibrium Model", The American Economic Review, Vo\. 82, No.l, 84-99. Neary, J.P. (1994) "Cost asymmetries in international subsidy games: Should governments help winners or losers?," Journal of International Economics, Vo1.37, pp . 1 97-2 1 8. Qiu Larry D., 1995, "Strategic Trade Policy under Uncertainty", Review of International Economics, Vo!. 3, No.l, 75-85. Shubik, M., 1982, Game Theory in the Social Sciences, Cambridge, Mass.: The MIT Press.
13
NOTES
i According to Klemperer and Meyer [1986], if a cost function is convex or rather concave,
quantitative competition is chosen. If a cost function is concave or rather convex, price
competition is chosen. This result came from the variation of uncertainty, e, which is an
intercept ofthe y-axis of the demand function.
ii In this case, p rices of both firms increase and production volumes decrease. However,
the home firm can increase its profit.
iii Qiu [95] studied the non-linear subsidy. However, the idea of equilibrium in this
paper is different from his idea of equilibrium_
iv Desp ite the length of the segments, all segments approach segments located on the
same line.
14
No. Author(s) Title
286 Natsuko OKA Neither Exit nor Voice: Loyalty as a Survival Strategy for the Uzbeksin Kazakhstan 2011
285Ikuo KUROWA, KaoruNABESHIMA, and KiyoyasuTANAKA
Innovation Networks among China, Japan, and Korea: Evidence fromJapanese Patent Data 2011
284 Hitoshi SUZUKI Preliminary Discussions on the Urbanization of Rural Areas inModern Iran 2011
283 Kozo KUNIMUNE A Model of Economic Growth with Saturating Demand 2011
282 Etsuyo MICHIDA, Cemal Atici, andMichikazu KOJIMA Does Quality Matter in the Iron and Scrap Trade? 2011
281 Kazunobu HAYAKAWA, FukunariKIMURA, and Hyun-Hoon LEE How Does Country Risk Matter for Foreign Direct Investment? 2011
280 Kazunobu HAYAKAWA andNobuaki YAMASHITA
The Role of Preferential Trade Agreements (PTAs) in FacilitatingGlobal Production Networks 2011
279 Noriyuki YANAGAWA and MarikoWATANABE
Ex ante barganing and ex post enforcement in trade credit supply:Theory and Evidence from China 2011
278 Yoko ASUYAMA Skill Sorting, Inter-Industry Skill Wage Premium, and ProductionChains: Evidence from India 1999-2000 2011
277 Yoko ASUYAMA Skill Distribution and Comparative Advantage: A Comparison ofChina and India 2011
276 Bo MENG, Norihiko YAMANO andColin WEBB
Application of Factor Decomposition Techniques to VerticalSpecialisation Measurement 2011
275 Kazunobu HAYAKAWA Measuring Fixed Costs for Firms’ Use of a Free Trade Agreement:Threshold Regression Approach
2011
274 Kenmei TSUBOTA,Yujiro KAWASAKI
Myopic or farsighted:Bilateral Trade Agreements among threesymmetric countries
Location Choice of Multinational Enterprises in China: Comparisonbetween Japan and Taiwan 2010
250 Kazunobu HAYAKAWA, KiyoyasuTANAKA, Yasushi UEKI Are Trading Partners Complementary in International Trade? 2010
249 Takeshi INOUE, ShigeyukiHAMORI
How Has Financial Deepening Affected Poverty Reduction in India?Empirical Analysis Using State-Level Panel Data 2010
248 Hisatoshi HOKEN Restoration of Micro Data of John Lossing Buck’s Survey and Analysis of theInverse Relationship between Yield and Farm Size in Rural China in the 1930’s 2010
247 Quoc Hung NGUYEN Liability Dollarization and Fear of Floating 2010
246 Hideki HIRAIZUMI Trade of Heilongjiang Province (China) with Russia 2010
245 Abu S SHONCHOY The Dynamics of Spending and Absorption of Aid: Panel DataAnalysis 2010
244 KHOO Boo Teik Cyber-networks, physical coalitions and missing links: Imagining andrealizing dissent in Malaysia 1998–2008 2010
243 Miwa TSUDA Kenya's 2007 Election Crisis 2010
242 Takeshi INOUE Effectiveness of the Monetary Policy Framework in Present-day India:Have Financial Variables Functioned as Useful Policy Indicators? 2010
241 Kiyoyasu TANAKA Transport Costs, Distance, and Time: Evidence from the JapaneseCensus of Logistics 2010
240 Takeshi KAWANAKA Polical Institutions and Policy Outcomes: Effects of PresidentialVetoes on Budget Making 2010
239 KHOO Boo Teik and Vedi R.HADIZ
Critical Connections: Islamic Politics and Political Economy inIndonesia and Malaysia 2010
238 KHOO Boo Teik Social Movements and the Crisis of Neoliberalism in Malaysia andThailand 2010
237 Ikuo KUROIWAHiromichi OZEKI
Intra-regional Trade between China, Japan, and Korea: Before andAfter the Financial Crisis 2010
236 KHOO Boo Teik No Insulation: Politics and Technocracy’s Troubled Trajectory 2010
235 Koichi KAWAMURA Is the Indonesian President Strong or Weak? 2010
The Determinants of Offshore Production by MultinationalCorporations (MNCs): A Comparison of Japanese and US MNCs 2010
233 Takeshi KAWANAKA Interaction of Powers in the Philippine Presidential System 2010
232 Takahiro FUKUNISHI FDI and Export particiaption of Local Firms in Africa: The Case ofthe Kenyan Garment Industry 2010
231 Hitoshi SUZUKI A Critical Review of Opinion Polls relating to Iranian Voting Intentions:Problems of Research Methodology as applied to Complex Societies 2010
230 Mai FUJITA The Diversity and Dynamics of Industrial Organisation: Transformation ofLocal Assemblers in the Vietnamese Motorcycle Industry 2010
229 Miki HAMADA, Masaru KONISHI Related Lending and Bank Performance: Evidence from Indonesia 2010
228 Hisao YOSHINO Strategic Trade Policy and Non-Linear Subsidy 2010
227 Masahiro KODAMA Large Fluctuations in Consumption in Least Developed Countries 2010
226 Chiharu TAMAMURACost Reduction Effects of “pseudo FTAs” in Asia -Application of a PriceModel Based on a Multilateral I/O Table- 2010
225 Koji KUBO Natural Gas Export Revenue, Fiscal Balance and Inflation in Myanmar 2010
224 Mariko WATANABESeparation of Control and Lash-flow Rights of State Owned ListedEnterprises: Channels of Expropriation following Discriminated Share Reformi Chi
2010
223 Haruka I. MATSUMOTO The Taiwan Strait Crisis of 1954-55 and U.S.-R.O.C. Relations 2010
222 Miwa TSUDA The Experience of National Rainbow Coalition (NARC): PoliticalParties inKenya from 1991 to 2007 2010
221 Kensuke KUBO Inferring the Effects of Vertical Integration from Entry Games: AnAnalysis of the Generic Pharmaceutical Industry 2010
220 Ikuo KUROIWAHiroshi KUWAMORI
Shock Transmission Mechanism of the Economic Crisis in East Asia:An Application of International Input-Output Analysis 2010