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Conjectural Variations, Market Power, and Optimal Trade Policy in a Vertically Related Industry
Author(s) -
Chang Winston W.,
Sugeta Hajime
Publication year - 2004
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2004.00428.x
Subject(s) - downstream (manufacturing) , upstream (networking) , product differentiation , subsidy , market power , industrial organization , competition (biology) , profit (economics) , bargaining power , microeconomics , economics , vertical integration , bargaining problem , business , market economy , monopoly , cournot competition , operations management , computer science , computer network , ecology , biology
The paper introduces the conjectural variations and bargaining approaches into a vertical model wherein a foreign upstream firm supplies one input to two downstream firms that produce differentiated products for the export market. Various downstream firms’ competition modes and upstream's pricing schemes emerge as special cases of this formulation. The authors show that the optimal export policy of a downstream country depends crucially on the downstream firms’ conjectures of rivals’ responses, the upstream firm's pricing schemes, their relative bargaining powers, and the degree of product differentiation. If the upstream's pricing or bargaining power is strong (weak) and if the downstream's degree of competition is high (low), a tax (subsidy) is optimal owing to a strong (weak) vertical profit‐shifting effect and a weak (strong) horizontal effect.
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