Abstract
We demonstrate that whether a good of a rival firm is a strategic substitute or a strategic complement is endogenously determined when the market inverse demand is hyperbolic. The relative competitiveness, which is expressed by the ratio of firms’ marginal costs, is the key factor. We derive optimal trade policies, which are dependent upon the firms’ form of strategic action. In particular, it is shown that if the home firm is relatively more efficient (inefficient) than the foreign rival, then it regards the rival’s choice variable as a strategic complement (substitute) and thus the optimal policy recommendation for the home government is to impose an export tax (to give an export subsidy) to the home firm.
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Preliminary version of this paper was presented at the 43rd Annual Meeting of the Western Regional Science Association held in Maui, Hawaii, February 25–28, 2004 and an workshop on international trade held in Niigata, Japan, May 21, 2004. The authors wish to thank four referees, Ferenc Szidarovszky, J. Barkley Rosser, Jr., Börje Johansson, Kenneth E. Corey, Jota Ishikawa, Yasuhiro Sakai and participants of the meeting and the workshop for helpful comments and constructive suggestions. Akio Matsumoto is grateful for financial supports from Chuo University (Joint Research Grant, 0382) and the Japan Ministry of Education, Culture, Sports, Science and Technology (Grant-in-Aid for Scientific Research (B), 15330037).
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Matsumoto, A., Serizawa, N. Strategic trade policy under isoelastic demand and asymmetric production costs. Ann Reg Sci 41, 525–543 (2007). https://doi.org/10.1007/s00168-006-0103-5
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DOI: https://doi.org/10.1007/s00168-006-0103-5