Optimal trade and industrial policy under oligopoly

Jonathan Eaton, Gene M. Grossman

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Abstract

We analyze the welfare effects of trade and industrial policy under oligopoly, and characterize optimal intervention under a variety of assumptions about market structure and conduct. When all output is exported, optimal policy with a single home firm depends on the difference between foreign firms' actual responses to the home firm's actions and the responses that the home firm conjectures. A subsidy often is indicated for Cournot behavior, but a tax generally is optimal if firms engage in Bertrand competition. If conjectures are "consistent," free trade is optimal. With domestic consumption, intervention can raise national welfare by reducing the deviation of price from marginal cost.

Original languageEnglish (US)
Pages (from-to)383-406
Number of pages24
JournalQuarterly Journal of Economics
Volume101
Issue number2
DOIs
Publication statusPublished - May 1986

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All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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