Strategic Trade Policy and Non-Linear Subsidy -In The Case of Price Competition-

Discussion Papers


by YOSHINO Hisao

March 2011 (Revised February 2012)


In a strategic trade policy, it is assumed, in this paper, that a government changes its disbursement or levy method so that the reaction function of a home firm approaches infinitely close to that of a foreign firm. In the framework of Bertrand-Nash equilibrium, Eaton and Grossman[1986] showed that an export tax is preferable to an export subsidy. In this paper, it is shown that export subsidy is preferable to an export tax in some cases in the framework of the Bertrand-Nash equilibrium, considering the uncertainty in demand. Historically, many economists have mentioned non-linear subsidy or tax. However, optimum solution to this has not yet been shown, and so the optimum solution is shown in this paper.

Keywords: strategic trade policy, non-linear subsidy, Bertrand-Nash equilibrium, Stackelberg equilibrium
JEL classification: F12, F13, L52, C72

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