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Discussion Paper Details

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Title: Export Subsidies and Price Competition

Author(s): J Peter Neary

Publication Date: August 1989

Keyword(s): Bertrand Competition, Exports, Subsidies and Trade Policy

Programme Area(s): International Trade and Regional Economics

Abstract: This paper examines optimal policy towards a home exporting firm which competes on price with a foreign firm. Two policy instruments are compared: an output subsidy and a price subsidy. The paper also considers two games: the conventional ex ante game, in which the government sets the value of the subsidy before firms set their prices, and the ex post game, where firms first set their prices in the anticipation of a subsidy by the government at the second stage. It is shown that the two types of subsidy are equivalent in the ex ante game and that a higher level of welfare can always be achieved in the ex ante than in the ex post game. This reinforces the view that optimal policy in a model characterized by Bertrand competition is an export tax rather than a subsidy.

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Bibliographic Reference

Neary, J. 1989. 'Export Subsidies and Price Competition'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=327