Strategic trade policy for network goods oligopolies

Abstract

We analyze strategic trade policy for differentiated network goods oligopolies under alternative scenarios, when there is export-rivalry between two countries. We show that, under price competition without managerial delegation, it is optimal to tax (subsidize) exports, if network externalities are weak (strong). But, the opposite is true under price competition with relative performance based managerial delegation in firms. In contrast, under quantity competition, the optimal trade policy always involves subsidization of exports. Nonetheless, the optimal rate of export-subsidy under quantity competition is always higher than that under price competition. We also show that, under quantity (price) competition without managerial delegation, trade policy interventions in the presence of sufficiently strong (weak or very strong) network externalities lead to higher social welfare of each exporting country compared to that under free-trade. However, under quantity (price) competition with managerial delegation, trade policy interventions result in Pareto-inferior outcomes always (unless network externalities are strong).