Strategic Trade and Delegated Competition

26 Pages Posted: 8 May 2003

See all articles by Nolan H. Miller

Nolan H. Miller

University of Illinois at Urbana-Champaign

Amit Pazgal

Rice University

Date Written: October 2002

Abstract

Strategic trade theory has been criticized on the grounds that its predictions are overly sensitive to modeling assumptions. For example, Eaton and Grossman (1986) show that Brander and Spencer's (1985) seminal result - i.e., when firms compete by setting quantities the optimal policy involves governments subsidizing their domestic industries - is reversed if the firms compete by setting prices. 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 whether firms compete by setting prices or quantities. In a linear-demand model in which managers are compensated based on a linear combination of their own firm's profit plus a (possibly negative) multiple of the rival firm's profit, the optimal policy is to subsidize if goods are substitutes and tax if the goods are complements.

Keywords: strategic international trade theory, delegated competition, delegation games

JEL Classification: F1, L1

Suggested Citation

Miller, Nolan and Pazgal, Amit I., Strategic Trade and Delegated Competition (October 2002). Available at SSRN: https://ssrn.com/abstract=346800 or http://dx.doi.org/10.2139/ssrn.346800

Nolan Miller (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
1-217-244-2847 (Phone)

HOME PAGE: http://www.business.illinois.edu/nmiller

Amit I. Pazgal

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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