DP1968 Strategic Trade and Industrial Policy Towards Dynamic Oligopolies

Author(s): Dermot Leahy, J Peter Neary
Publication Date: September 1998
Keyword(s): Commitment, Dynamic Consistency, Export Subsidies, Learning by Doing, R&D Subsidies, Strategic Trade Policy
JEL(s): F12, L13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1968

We characterize optimal trade and industrial policy in dynamic oligopolistic markets. If governments can commit to future policies, optimal first-period intervention should diverge from the profit-shifting benchmark to an extent which exactly offsets the strategic behaviour implied by Fudenberg and Tirole's 'fat cats and top dogs' taxonomy of business strategies. Without government commitment, there is an additional basis for intervention, whose sign depends on the strategic substitutability between future policy and current actions. We consider a variety of applications (to R&D spillovers, consumer switching costs, etc.) and extensions to second-best, revenue-constrained and entry-promotion policies.