Strategic trade policy

Question 1

What does strategic trade policy aim to see?

Answer 1

How governments might invest in subsidies for an industry to increase its welfare

Question 2

What is the setting for the Brander Spencer model?

Answer 2

Home and foreign compete on third market
firms are in duopoly on third market
Firms have increasing returns to scale -> market power

Question 3

What is the linear demand function in brander spencer theorem?
h= home, f= foreign
What are the reaction functions+

Answer 3

Demand:
p = α - b(q(f) + q(h))

Reaction f.
q(f) = (a-c)/2b - 1/2q(h)
Symmetrical for home

Question 4

What will happen if Homes government gives export subsidy?

What will happen to welfare?

Answer 4

Cournot model:
Home’s reaction function will change and shift to the right meaning that we will no longer be in the Cournot equilibrium. Instead we will be in B-S equilibrium that is in favour of home.

Since they compete in third market we can measure welfare as the profits. When home receives a subsidy from gov. They reallocate some of Foreigns welafre to Home.