Barbara J. Spencer

Export Subsidies and International Market Share Rivalry

Countries often perceive themselves as being in competition with each other for profitable international markets. In such a world export subsidies can appear as attractive policy tools, from a national point of view, because they improve the relative position of a domestic firm in noncooperative rivalries with foreign firms, enabling it to expand its market share and earn greater profits. In effect, subsidies change the initial conditions of the game that firms play. The terms of trade move against the subsidizing country, but its welfare can increase because, under imperfect competition, price exceeds the marginal cost of exports. International noncooperative equilibriumis characterized by such subsidies on the part of exporting nations, even though they are jointly suboptimal.

Strategic Commitment with R&D: The Symmetric Case

When research and development take place before the associated output is produced, imperfectly competitive firms may use R&D for strategic purposes rather than simply to minimize costs. Using a simple symmetric two-stage Nash duopoly model, we show that such strategic use of R&D will increase the total amount of R&D undertaken, increase total output, and lower industry profit. However, the strategic use of R&D introduces inefficiency in that total costs are not minimized for the output chosen. Nevertheless, net welfare may rise, and certainly rises if products are homogeneous, marginal cost is non-decreasing, and demand is convex or linear.

Trade Warfare: Tariffs and Cartels

National governments have incentives to intervene in international markets, particularly in encouraging export cartels and in imposing tariffs on imports from imperfectly competitive foreign firms. Although the optimal response to foreign monopoly is usually a tariff, a specific subsidy will be optimal if demand is very convex, as with constant elasticity demand. If ad valorem tariffs or subsidies are considered, a subsidy is optimal if the elasticity of demand increases as consumption increases.The critical conditions in both ad valorern and specific cases hold generally for Cournot ologopoly. Noncooperative international policy equilibrium will be characterized by export cartels and rent-extracting tariffs.

Tariffs and the Extraction of Foreign Monopoly Rents under Potential Entry

This paper examines the incentives for using tariffs to extract monopoly rents from imperfectly competitive foreign firms. Using a simple Stackelberg entry deterrence model, the rent-extracting policy is attractive if the foreign firm faces a threat of domestic entry. Despite transportation costs, the Stackelberg leader-follower model can lead to intra-industry trade in the same commodity.

Unionized oligopoly and international trade policy

Abstract Labor market conditions can have important effects on imperfectly competitive rivalries between firms. This paper examines the consequences of unionization for the rivalry between duopoly firms in an international environment, using the generalized Nash bargaining solution to determine the wage, and the (noncooperative) Nash equilibrium to determine the output equilibrium. The paper analyzes the trade policy incentives resulting from unionization, focusing on profit shifting tariffs, quotas and subsidies.

Strategic trade policy with endogenous choice of quality and asymmetric costs

This paper examines the strategic trade policy incentives for investment policies towards quality improvements in a vertically differentiated exporting industry. Firms first compete in qualities and then export to a third country market based on Bertrand or Cournot competition. Optimal policies are asymmetric across the two producing countries. Under Bertrand competition, the low-quality country subsidizes investment to raise export quality, while the high-quality country imposes a tax so as to reduce the quality of its already high quality exports. Under Cournot competition, the results are reversed with a tax in the low-quality country and a subsidy in the high-quality country.

Pre-commitment and flexibility: Applications to oligopoly theory

Abstract This paper considers several related strategic duopoly settings in which uncertainty creates an ‘option value’ from retaining flexibility by delaying investment or output decisions until after uncertainty is resolved. This value of flexibility must be weighed against the strategic value of pre-commitment, yielding a trade-off between flexibility and pre-commitment. We obtain a simple characterization of the timing of output decisions as a consequence of the degree of uncertainty. Particular attention is paid to the implications for entry-deterrence by an incumbent firm and to the possible flexibility-enhancing effects of investment in capital.

Rent-shifting export subsidies with an imported intermediate product

This paper argues that export subsidies aimed at shifting rents from foreign to domestic producers of a final good may also serve to shift rents to foreign firms supplying an intermediate good, weakening the incentive for the subsidy. By contrast, assuming Cournot competition for both the final and intermediate goods, this second layer of rent-shifting between final and intermediate good firms can strengthen the argument for an export subsidy if intermediate good firms are domestic. The domestic welfare implications of alternative rent-shifting policies (a production subsidy and an import tariff) at the intermediate good stage are also considered.

Foreign direct investment with unemployment and endogenous taxes and tariffs

It is well known that high tariffs can induce foreign direct investment or ‘tariff jumping’. This paper analyzes tariff jumping in the context of a host government which can set specific tariffs and taxes subject to the credibility constraint that the chosen levels be optimal once capital is irreversibly in place. The foreign multinational is assumed to choose its location and level of investment strategically, taking into account the induced tax and tariff levels. In the presence of unemployment, the optimal tariff exceeds the optimal tax for any given level of capital investment, leading to foreign direct investment.

Moral Hazard and Limited Liability: Implications for the Theory of the Firm

This paper presents a theory of the firm based on moral hazard in the provision of effort by an owner-manager who borrows money in financial markets under conditions of limited liability. The authors examine the relationship between the financial structure of the firm and the effort and output decisions of the owner-manager. Results are reported concerning the determination of the firms optimal financial structure, and concerning the positive and normative implications of financial structure for pure competition and monopoly. They also identify a strategic advantage from equity finance under Cournot oligopoly. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.