Competition for Firms in an Oligopolistic Industry: Do Firms or Countries Have to Pay?
37 Pages Posted: 11 May 2007
Date Written: April 2007
Abstract
We set up a model of generalised oligopoly where two countries of different size compete for an exogenous, but variable, number of identical firms. The model combines a desire by national governments to attract internationally mobile firms with the existence of location rents that arise even in a symmetric equilibrium where firms are dispersed. As economic integration proceeds, equilibrium taxes decline, switching from positive to negative levels, and then rise as trade costs fall even further. A range of trade costs is identified where economic integration raises the welfare of the small country, but lowers welfare in the large country.
Keywords: tax and subsidy competition, oligopolistic markets
JEL Classification: H25, H73, F15, F23
Suggested Citation: Suggested Citation
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