Trade policy and strategic decisions of companies in imperfect competition: Benefits from the application of a tariff and a subsidy

Abstract

The aim of this paper is to analyze the effects of international trade policy of the countries on the production and export decisions of companies where decisions are taken strategically. We will analyze in an imperfect competition model if it's better to fix an import tariff or export subsidy, and the reaction of the companies. Since countries are asymmetrical, we will study different cases in order to determine which is the most beneficial policy according to the size of the country. We will focus on the study of four essential cases, first where the two countries are symmetrical and very small, the second where there is a small country and another one that is twice the first one, the third case will be two symmetric countries with medium demand. And finally, we'll study the case of two very large countries symmetrical. For this, in each case we make a model with two countries and two oligopolies, each located in a country; and we will use a three-stage game using the usual concept of Nash equilibrium sub-game perfect.