1. 6. Strategic Export Policy
Unless stated otherwise: no domestic consumption of export good.
6.1 Competitive Foreign Conduct
Assumptions:
Perfect Competition in domestic country
Constant marginal costs = export supply curve
Optimal export quantity Xm: intersection of MC and MR, obtained via tax t = distance between points 2 and 3 in figure 6.1
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2. Figure 6.1
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3. Imperfect competition in domestic country: Price between MC and PM.
Same outcome can be achieved by a domestic pure monopolist or an export cartel charging the monopoly price (only legal cartel in USA).
Imperfect competition in domestic country: Price between MC and PM.
Perceived marginal revenue greater than true marginal revenue: Oligopolists impose externality on competitors (business stealing effect)
Optimal tax: difference between perceived and true marginal revenue.
Main result: For competitive foreign conduct the optimal export policy is a tax on domestic exports (not a subsidy).
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4. Figure 6.2
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5. 6.2 Profit Shifting
Cournot Duopoly: domestic and foreign firm compete in a third country, no domestic consumption. Total profit smaller than monopoly profit. Domestic firm could increase her profit by acting as Stackelberg leader – however, committment problem. Government policy could solve this problem (Brander and Spencer 1985).
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6. Figure 6.3
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7. pd(x,x*) = p(x +x*) demand for given foreign sales.
Government has first mover advantage: export subsidy shifts reaction function of the domestic firm to the right, Stackelberg equilibrium can be achieved, profit increase greater than subsidy.
Justification for government intervention: Divergence of private marginal revenue from social marginal revenue.
pd(x,x*) = p(x +x*) demand for given foreign sales.
po(x,c*) = p(x +*(x,c*)) „true“ demand function
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8. Figure 6.4
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9. Figure 6.5
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10. Intersection of pd and po at equilibrium quantities of the Cournot-game. po is more elastic than pd.
Figure 6.6: Point 3 depicts Stackelberg equlibrium, point 1 the Cournot-equilibrium. Point 3 can be reached as equilibrium by reducing MR by subsidy s which equals the difference between perceived and true marginal revenue.
Perceived MR at Xm may be above true MR ( tax) or below true MR ( subsidy)), depending on degree of competition abroad and number of domestic firms.
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11. Figure 6.6
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12. 6.3 Price Competition
Quantity competition  subsidy optimal if domestic industry is sufficiently concentrated (monopoly). Price competition: Subsidies are never desirable. Quantities (Cournot): strategic substitutes (= downward sloping reaction functions). Prices (Bertrand): strategic complements (= upward sloping reaction functions). Subsidy shifts reaction function to the left – profits decline  tax on exports increases domestic and foreign profits.
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13. Figure 6.7
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14. Comparing Figures 6.5 and 6.8:
Cournot-competition: Perceived demand function less elastic than true one.
Bertrand-competition: Perceived demand function more elastic than true one.
Figure 6.9: Optimal export tax for one domestic firm.
For many firms tax increases: price increase raises sales of other domestic firms.
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15. Figure 6.8
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16. Figure 6.9
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17. 6.4 Entry with increasing returns
Assuming fixed costs and free entry implies an increase of the number of domestic firms and therefore an increase of total domestic fixed costs  reverses positive effect of subsidies even with Cournot-competition.
If the number of firms is determined by zero profit condition optimal strategic policy is an export tax.
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18. 6.5 Resource constraints
Partial analysis: Subsidy (export tax) if perceived marginal revenue is smaller (greater) than true MR.
Two export goods, each needs one unit of a constrained input („scientist“) per unit of ouput.
Figure 6.10: Equilibrium allocation of scarce resource at intersection of perceived MRs, efficient allocation at intersection of true MRs  industry 2 should increase output.
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19. Above rule would suggest subsidy for industry 1 – would move the equilibrium away from the efficient allocation.
Optimal policy: Closing the gap between points 2 and 3 via a suitable combination of taxes and subsidies.
Gain from optimal policy smaller than suggested by partial analysis (shaded triangle, not entire triangle from the move from 1 to 2)
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20. Figure 6.10
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21. Two-Way Export Policies
Two-stage game: Stage 1: each government chooses export subsidy Stage 2: firms play Cournot-game Equilibrium: both countries subsidize, welfare smaller than without export subsidies Prisoners‘ dilemma Co-operative solution: both countries impose export taxes.
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22. Figure 6.11
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23. Bertrand game (see figure 6
Bertrand game (see figure 6.12): In equilibrium both countries impose export taxes  welfare higher than without government intervetion. First best: Point 3 – too little intervention.
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24. Figure 6.12
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25. 6.7 Consumption Effects
Definition of Welfare changes: dW = dpXf + (pc  c)dXd + (p  c)dXf ToT + cons.wedge + prod.efficiency effect No imports dW = [d(pXf )  cdXf ]+ (pc  c)dXd First best policy tries to achieve for Exports: True marginal revenue equal to marginal cost Domestic consumption: price equal to marginal cost
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26. Satisfaction of domestic demand: Expand production Reduce
Both conditions together imply that true marginal cost of exports equals domestic consumer price.
Satisfaction of domestic demand:
Expand production
Reduce
In the optimum: both are equally costly.
Example:
Cournot competition and fixed number of firms.
Export policy: tax equal to difference between true and perceived marginal return (subsidy)
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27. Export policy: tax equal to difference between true and perceived marginal return (subsidy) sf. Without domestic consumption: equivalence of production and export subsidy. Optimal consumption: pc(Xd) + pc‘(Xd)Xd/n = c‘(Xd + Xf) − sd Subsidy of domestic consumption equal to markup. Alternative: subsidy of domestic production equal to sd, export tax equal to sf − sd
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