DP277 International Capacity Choice and National Market Games

Author(s): Anthony Venables
Publication Date: October 1988
Keyword(s): Cournot Equilibrium, Economic Capacity, International Trade, Market Structure, Oligopoly
JEL(s): 026, 411, 422, 611, 641
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=277

A series of models are developed in which international trade is modelled as a two-stage game between firms in two countries. At the first stage firms choose their productive capacity. At the second stage different types of market game are played. The most interesting case is that in which firms play a separate price game in each national market, given their worldwide capacity levels. It is established that (i) firms use capacity strategically, in order to manipulate the distribution of rivals' output between markets; (ii) the volume of intra-industry trade is intermediate between the two cases most extensively studied in the trade literature (integrated- and segmented-market Cournot equilibria); and (iii) countries gain from small import tariffs and export subsidies, but these gains are less than in the case of segmented markets and a Cournot equilibrium.