Strategic trade and delegated competition

Strategic trade theory has been criticized on the grounds that its predictions are overly sensitive to modeling assumptions. Applying recent results in duopoly theory, this paper considers three-stage games in which governments choose subsidies, firms' owners choose incentive schemes for their managers, and then the managers compete in the product market. We show that if firms' owners have sufficient control over their managers' behavior, then the optimal strategic trade policy does not depend on the mode of product-market competition, i.e., whether firms compete by setting prices or quantities.     

Strategic trade policies with first-mover and second-mover advantages in a vertical structure

With strategic trade policies, we consider first- and second-mover advantages in a vertical structure given the two-part tariff contract (composed of the input price and the fixed fee) of an upstream firm, where a home and a foreign final-good firms export to a third-country market. We find that the upstream firms’ and governments’ preference orderings over sequential versus simultaneous play and over free trade versus a regime of subsidies contrast with early results in the strategic trade policy. Thus, the endogenous market structure is that (i) the potential leader chooses the Leader role with quantity strategies, and the equilibrium trade regime is unilateral subsidy regardless of the nature of goods; (ii) with price strategies, the potential leader chooses the simultaneous timing, and the equilibrium trade regime is bilateral taxes (free trade) when goods are substitutes (complements).     

Galloping,creeping, or receding internationalization

Using a simple two-period linear durability choice trade model, we examine strategic trade policy in terms of taxes or subsidies levied on duopolistic firms in sales markets. In contrast to earlier parametric durability studies we show that the optimal export policy is not necessarily a tax when product durability is endogenously determined. Our analysis indicates that with endogenous adjustment of durability either a tax, subsidy, or laissez-faire policy (zero subsidy) may be optimal. In addition, we find that any trade policy (tax or subsidy) has the unforeseen effect of changing the firms' product durability. For example, future expected subsidies tend to decrease the domestic firm's product durability while increasing the foreign firm's chosen durability.     

On Market Integration and Product R&D: A Monopoly Case

Applying a monopoly model with endogenous quality choice to the case of multiple national markets, we consider the effect of market integration on product R&D incentives (i.e., quality-improving), profit, and consumer surplus. We demonstrate that the effect of market integration depends on the difference in income distributions between two countries and the level of trade cost. In particular, if the difference in income distributions between two countries is large (small) and/or trade cost is low (high), market integration can decrease (increase) the level of product quality and social welfare in the two countries.     

Strategic Compatibility Choice,Network Alliance,and Welfare

Based on a simple model of compatibility choice under differentiated Cournot duopoly with network externalities, we consider how the levels of a network externality and product substitutability affect the choice of compatibility. In particular, if the level of network externality is larger than that of product substitutability, there are multiple equilibria involving imperfect and perfect compatibility. Furthermore, we demonstrate the conditions for constructing such a network alliance so that firms provide perfectly compatible products. The network alliance is stable and socially optimal.     

A reappraisal of strategic trade policies with the endogenous mode of competition under vertical structures

This paper examines the endogenous choice of competition mode with strategic export policies in vertically related markets when each upstream firm located in each country determines the terms of the two-part tariff contract by maximizing generalized Nash bargaining. We show that (i) choosing Cournot (Bertrand) competition is the dominant strategy for both downstream firms when goods are substitutes (complements), which leads Pareto superior regardless of the nature of goods under the optimal trade policies; (ii) irrespective of rival’s competition mode, the optimal trade policy is an export subsidy under Cournot competition and an export tax under Bertrand competition; and (iii) trade liberalization may give rise to changes of competition mode and increase of social welfare.     

我国高新技术产业贸易竞争力分析

近年来,我国高新技术产品出口在制成品出口中的比重不断增加,由此引发对我国高新技术产业贸易竞争力及比较优势的思考。本文通过对比传统贸易理论和内生比较优势理论,利用贸易竞争力指数和“显示”比较优势指数对我国高新技术产业的国际竞争力进行了测算,并运用战略性贸易政策对我国发展高新技术产业提供了政策支持。     

R&D Investments in Markets with Network Effects

We consider process R&D investments of firms in markets with network effects and incomplete product compatibility. Our results indicate that network effects increase the firms’ individual investments in R&D. The presence of network effects weakens the positive impact of R&D cooperation on firms’ R&D investments. Further, we show that R&D competition can bring socially optimal level of investment, and this is not possible in markets without network effects. Finally, our results suggest that innovation policy oriented at promoting R&D cooperation between enterprises can be counterproductive in markets with network effects and incomplete product compatibility.

     

Optimal Timing of Advertising with Demand Spillovers

We construct a model of a horizontally differentiated duopoly with demand spillovers in which advertising influences the willingness-to-pay of consumers for products and thereby affects not only market share, but also the level of market demand. Furthermore, firms decide the timing as well as the level of advertising. We first derive a subgame perfect Nash equilibrium and Stackelberg equilibria in the advertising competition. Then, using the framework of an endogenous timing decision game with an observable delay (i.e., Hamilton and Slutsky, Games Econ Behavior 2: 29–46, 1990), we consider the optimal timing of advertising. We demonstrate that the optimal timing depends on the degree of demand spillovers and the product substitutability. In particular, if there are sufficient asymmetric demand spillovers between firms, there is a unique Stackelberg equilibrium in the advertising competition, in which the firm providing the product with small (large) demand spillovers chooses to invest in advertising early (late), regardless of the mode of competition.     

Policies and international trade agreements on technical compatibility for industries with network externalities

The paper considers a country (home) in which consumers have heterogeneous preferences over ex ante incompatible domestic and imported products and benefit from a network externality. We analyze the cases with trade under perfect competition and the international duopoly, in which both governments strategically use policies toward compatibility but cannot use conventional trade policies. In both cases, the equilibrium outcome of the non-cooperative game depends upon the strength of the network externality effect and involves either an excessively high equilibrium level of compatibility (in combination with either too much or too little trade) or very low equilibrium levels of both compatibility and trade. The paper concludes with the analysis of the international agreements on policies toward compatibility and evaluates the existing provisions in the WTO legal system aimed at minimizing the trade-inhibiting impact of standards and regulations in the area of technical compatibility.     

Female consumers׳ intention to be involved in fair-trade product consumption in the U.S.: The role of previous experience,product features,and perceived benefits

Fair-trade practices include paying fair wages, supporting participatory workplaces and environmentally sustainable production, and developing long-term and supportive buyer-producer relationships (Kunz, G. I. and Garner, M. B. (2011), Going Global (2nd ed.), New York, NY: Fairchild Books). Fair-trade is both a political movement organized around the theme of trade justice, and the practice of particular types of trading and production relationships (Mare, A. L. (2008), The impact of fair-trade on social and economic development: a review of the literature, Geography Compass, 2, (6), 1922–1942). The aim of this study was to examine female consumers׳ previous experience, product features and perceived benefits of fair-trade product consumption. Specifically, the study examined how previous experience or lack of experience in fair-trade product consumption influences female consumers׳ purchase decisions by considering the impact of product features and perceived benefits. Results indicated that consumers who did not have fair-trade products experience made their purchase decision based on traditional product features (i.e., style and new trends). On the other hand, consumers who had experience with fair-trade products more consider ethical responsibility (i.e., perceived consumer effectiveness) in fair-trade shopping. Implications and limitations were discussed.     

Inter-firm R&D collaboration within and across national borders

We set up a model to investigate the strategic aspect of a firm's incentive to collaborate in cost-reducing R&D with either a local or a foreign partner. We argue that collaboration with a foreign firm is preferred to collaboration with a local firm if the extra profits generated by a foreign collaboration exceed the additional cost of coordinating collaboration across national borders. We show that foreign collaboration is more likely the bigger the home market size of the foreign firm and, given certain conditions, the higher the international trade cost. We also show that whenever a foreign collaboration arises in equilibrium, it is efficient (i.e., world-welfare-maximising) and that there are cases where (a) a foreign collaboration would be efficient but a local collaboration emerges in equilibrium, and (b) an efficient foreign collaboration emerges in equilibrium, but one of the countries would prefer a local collaboration. We briefly consider the policy implications of these findings.     

Anti‐dumping duty circumvention through trade rerouting: Evidence from Chinese exporters

We study the evasion of US anti‐dumping duties by some Chinese exporters through trade rerouting via third countries or regions. Using detailed monthly trade data reported by China and the US Customs during the period of 2002–06, we find that US anti‐dumping actions against China lead to a stronger positive correlation between US imports from third countries and Chinese exports to the same third countries. Such a positive correlation is more pronounced for the products subject to anti‐dumping duties (treatment groups) than similar products not subject to these duties (control groups). The evidence is stronger for less‐differentiated products whose certificates of origins are easier to be modified and is stronger for third countries where the rerouting cost is low. These findings are consistent with a trade rerouting story, rather than a simple story of trade diversion (i.e., increase in some third countries' imports from China) and trade deflection (i.e., increase in some third‐country exports to the US). We also rule out other alternative stories, consider prior production in third countries and concurrent anti‐dumping actions against China or third countries, pay a particular attention to the many zero trade flows in the monthly level data and check the robustness to using an alternative control group and quarterly data, etc.     

A model of product compatibility introduction with consumer recognition

Firms recognizing consumers often use behavior-based pricing (BBP), i.e., condition prices on purchase history. Prior research studies the framework with independent product offerings and shows that BBP leads to poaching and decreases each firm's profits. In this paper, we investigate the efficacy of BBP in a two-period duopoly where firms provide compatible product categories and endogenously determine the levels of cross-compatibility. We first revisit the impact of behavior-based pricing in the traditional framework with independent offerings and verify the competition-increasing effect of BBP. We then examine how the impact of BBP differs when firms introduce product compatibility. Interestingly, we find that firms can benefit from BBP when firms introduce product compatibility. More specifically, when the value consumers obtain from perfect compatibility is moderate, implementing BBP is more profitable than without consumer recognition. The intuition is that when the value of perfect compatibility is medium, consumers do not expect good switching deals in the second period and firms can charge higher prices in the first period. Our findings not only complement the BBP literature but also shed light on the firms' strategic decisions on product compatibility.     

Strategic trade policy in the presence of reputation spillovers

With the emergence of North–South intra-industry trade in products where consumers value quality, exporting countries potentially face significant barriers to entry. Due to the existence of asymmetric information about new products in a foreign market, the producer's reputation becomes an important factor in determining whether consumers choose to make a purchase. The purpose of this paper is to add learning externalities across multiple products to a model of endogenous firm entry and quality in order to examine the implications for commercial intervention. Building on the work of Mayer (1984) and Grossman and Horn (1988), we introduce learning across multiple products in the presence of incomplete information. If the reputation of the initial entrants from a country is poor, it raises the informational barriers to entry. Consequently, strategic trade policy depends on both the quality choice of firms entering the market for exports as well as the degree of product interrelatedness. In the presence of high and lowquality producers, across-the-board subsidization hinders rather than promotes exports in developing countries.     

Rivalry in uncertain export markets: commitment versus flexibility

This paper examines optimal trade policy in a two-period oligopoly model, with a home and a foreign firm choosing capital and output. Demand uncertainty, resolved in period two, gives rise to a trade-off between strategic commitment and flexibility in the firms’ investment decisions. Firms’ investment timing is endogenous and can be manipulated by the home government, which sets a subsidy before firms decide when to invest. We show that when the government wishes to manipulate investment timing, it will choose its policy to deter investment commitment by the home or the foreign firm.     

CROSS-PRODUCT SPILLOVERS IN THE SEMICONDUCTOR INDUSTRY: IMPLICATIONS FOR STRATEGIC TRADE POLICY

Although the manufacture of semiconductor products has been alleged to create substantial benefits to the economy resulting from the spillover of knowledge, this claim, with the exception of Irwin and Klenow (1994a), has not been subjected substantially to empirical analysis. Our article extends the analysis of Irwin and Klenow and develops and tests a model of knowledge spillovers across several semiconductor memory products. The results indicate that cross-product spillovers from Dynamic Random Access Memories (DRAMs) the integrated circuit product often designated as a "technology driver" to other memory products were limited. We discuss the implications of these results for strategic trade policy.     

Marketing compatible, yet differentiated, products : In search of competitive equilibria when network externalities are at work

Many goods are characterized by the fact that their utility increases with the number of consumers who buy them. It is the case for computers or communication networks, for example. Such goods are said to be subject to network externalities. We study those externalities in the context of a product differentiation model where product characteristics (or the image of the firm) are taken into account.We consider a market where two firms sell differentiated products and we study an equilibrium where the firms are competing in quantities (Cournot model) as well as in quality (two-stage game). We show how the degree of differentiation between the firms (or their products) and the compatibility decision are affected by the externality effect.     

CROSS-PRODUCT SPILLOVERS IN THE SEMICONDUCTOR INDUSTRY: IMPLICATIONS FOR STRATEGIC TRADE POLICY

Although the manufacture of semiconductor products has been alleged to create substantial benefits to the economy resulting from the spillover of knowledge, this claim, with the exception of Irwin and Klenow (1994a), has not been subjected substantially to empirical analysis. Our article extends the analysis of Irwin and Klenow and develops and tests a model of knowledge spillovers across several semiconductor memory products. The results indicate that cross-product spillovers from Dynamic Random Access Memories (DRAMs) the integrated circuit product often designated as a ''technology driver'' to other memory products were limited. We discuss the implications of these results for strategic trade policy.