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Optimal Trade Policy under Homogeneous Bertrand Competition *
Author(s) -
Hwang Hong,
Mai ChaoCheng,
Yang YaPo
Publication year - 2008
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.1467-9396.2008.00761.x
Subject(s) - economics , subsidy , bertrand competition , homogeneous , grossman , microeconomics , competition (biology) , marginal cost , cournot competition , bertrand paradox (economics) , product differentiation , commercial policy , product (mathematics) , international economics , oligopoly , market economy , keynesian economics , ecology , physics , geometry , mathematics , biology , thermodynamics
In a seminal paper, Eaton and Grossman (1986) conclude that an export tax is optimal if firms produce heterogeneous products and engage in Bertrand price competition. In particular, they made a comment that could be interpreted to mean that even in the case of a homogeneous product, the optimal policy is still an export tax. This paper has re‐examined the case and found that the optimal export policy can be an export subsidy, free trade, or an export tax, depending on the marginal cost differential between the domestic and the foreign firms. Moreover, if government intervention entails a cost, free trade becomes the only optimal policy.