Strategic Trade and Industrial Policy Towards Dynamic Oligopolies

The theory of strategic trade policy has grown from precocious urchin to mature teenager and is now part of the central canon of international trade theory. Much of its initial appeal came from the fact that it appeared to provide a stronger justiÆcation for interventionist measures such as tariffs and export subsidies than traditional competitive theory. However, as is now well known, the specific policy recommendations of the theory are highly sensitive to changes in assumptions about firm behaviour, entry, and so on. For this reason, possibly a more important contribution of the theory is that it high- lights a key aspect of public policy in oligopolistic markets: that governments and firms are likely to differ in their ability to commit to future actions. Thus the desirability of intervention, whether an export subsidy as in Brander and Spencer (1985) or an export tax as in Eaton and Grossman (1986), derives from the government's assumed ability to commit to policies which will remain in force while firms take their decisions on outputs or prices. The optimal policy moves the home firm to the point which it would attain unaided if it had a Stackelberg first-mover advantag