Working Paper: CEPR ID: DP327
Authors: Peter Neary
Abstract: This paper examines optimal policy towards a home exporting firm which competes on price with a foreign firm. Two policy instruments are compared: an output subsidy and a price subsidy. The paper also considers two games: the conventional ex ante game, in which the government sets the value of the subsidy before firms set their prices, and the ex post game, where firms first set their prices in the anticipation of a subsidy by the government at the second stage. It is shown that the two types of subsidy are equivalent in the ex ante game and that a higher level of welfare can always be achieved in the ex ante than in the ex post game. This reinforces the view that optimal policy in a model characterized by Bertrand competition is an export tax rather than a subsidy.
Keywords: export subsidies; oligopoly models; Bertrand competition
JEL Codes: 410; 422; 612
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output subsidy (H23) | net price of home output (R31) |
| price subsidy (H20) | net price of home output (R31) |
| net price of home output (R31) | home firm's profits (L21) |
| net price of home output (R31) | home market share (L17) |
| subsidy level commitment (E64) | welfare (I38) |
| export subsidies (H20) | home firm's profits (L21) |
| export subsidies (H20) | welfare (I38) |
| ex ante subsidy approach (H23) | market dynamics (D49) |
| ex post subsidy approach (H23) | welfare (I38) |