James A. Brander

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.

A 'Reciprocal Dumping' Model of International Trade

This paper develops a model in which the rivalry of oligopolistic firms serves as an independent cause of international trade. The model shows how such rivalry naturally gives rise to ‘dumping’ of output in foreign markets, and shows that such dumping can be ‘reciprocal’ — that is, there may be two-way trade in the same product. Reciprocal dumping is shown to be possible for a fairly general specification of firm behaviour. The welfare effects of this seemingly pointless trade are ambiguous. On the one hand, resources are wasted in the cross-handling of goods: on the other hand, increased competition reduces monopoly distortions. Surprisingly, in the case of free entry and Cournot behaviour reciprocal dumping is unambiguously beneficial.

Oligopoly and Financial Structure: The Limited Liability Effect

The authors argue that product market decisions and financial structure will normally be related. Assuming an oligopoly structure in which financial decisions and output decisions follow insequence, it is shown that limited liability may commit a leveraged firm to a more aggressive output stance, expanding its market share and profit at the expense of a fully equity-financed rival. Firms will therefore have incentives to use financial structure to influence the product market, leading normally, to an internal solution for the debt equity ratio even in the absence of bankruptcy costs and tax advantages of debt.

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.

Bankruptcy Costs and the Theory of Oligopoly

This paper examines the relationship between financial decisions and output decisions in oligopolistic markets. Assuming a duopoly market structure in which financial decisions and output decisions follow in sequence, the authors analyze how bankrupt cy costs, which are incurred when the firm is unable to meet current debt obligations, affect the firms behavior in output markets. With fixed bankruptcy costs, firms have an incentive to increase output le vels if they take on more debt. Proportional bankruptcy costs lead to a U-shaped relationship between output and debt. Foresighted owners of firms are led to take into account the strategic output effects of financial structure when considering an optimal financial structure for the firm.

The role of fertility and population in economic growth

Two recently improved sets of cross-country panel data are combined in order to re-examine the effects of population growth and fertility on economic growth. Using a 107 country panel data set covering 1960-85, we find that high birth rates appear to reduce economic growth through investment effects and possibly through “capital dilution”, although classic resource dilution is not evident in the data. Most significantly, however, birth rate declines have a strong medium-term positive impact on per capita income growth through labour supply or “dependency” effects.

DYNAMIC OLIGOPOLY BEHAVIOUR IN THE AIRLINE INDUSTRY.

Abstract This paper examines the dynamic interaction between United Airlines and American Airlines on a set of duopoly routes. We estimate quarterly ‘conduct parameters’ (or ‘conjectural variations’) and test constant behaviour Bertrand, Cournot, and collusive models. We also test two regimeswitching models derived from the Green-Porter price war model, one based on reversion to Bertrand behaviour during price wars, the other on reversion to Cournot behaviour. The three constant behaviour models are all rejected. The regime-switching models can both describe the data but the Cournot-based version is preferred.