The optimal choice of trade policy in oligopolistic industries

Abstract

The analysis of trade policy has long been of interest to both academic economists and government policy makers. There has been a recent resurgence of interest in this area due to the mounting U.S. trade deficits. Economists have found that when markets are imperfectly competitive, there are certain trade policies that can benefit a country at the expense of others. The choice of policy is thus viewed as a strategic game between governments. This game is complicated by the presence of uncertainty in the market. This dissertation analyzes a government's optimal choice of trade policy under a variety of market structures and assumptions concerning the structure of costs faced by firm s. In particular, governments are shown to prefer price-type policy instruments, namely subsidies or taxes, in a highly uncertain environment, and quantity controls if demand is reasonably stable. Furthermore, this pattern of preferences is shown to hold across a variety if cost structures and assumptions regarding firm behavior.