Eliza Chilimoniuk. International Game in Strategic Trade Policy. Introduction

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1 Eli Chilimoniuk Inenionl Gme in Segi Tde Poliy Inoduion In mulieson siuion ih segi inedeendene eh gen eognies h he ofi he eeives deends no only on his on ion, u lso on he ehvio of ohe odues on he mke. Mulieson eonomi siuions vy gely in he degee o hih segi ineion is esen. Consideing diffeen yes of mkes, s ell s indusil ogniions in ems of vious segies, e n esily eognie h kind of deendeny eeen only fe mke lyes. This elionshi does no ke le on efely omeiive no monoolisi mke. In seing efe omeiion o monoolisi omeiion he nue of segi ineion is miniml. As Heffenn oined ou, oligoolies e highly inedeenden Heffenn, Sinli, 99. In his e I ill esen model of inenionl duooly nd effes of govenmens suo fo hei nionl odue. The ouline of his e is s follos. Fis, I nlye demnds, ouus nd elfe levels in ue duooly ih no govenmen inevenion. Seondly, hee ill e mde n nlysis of he imo iff o eo susidy effes on he mke hee o govenmens deide o inevene. Then I ill un o onside h hnges if only one ouny inevenes nd he ohe does nohing. Finlly, some finl houghs e ovided in he onluding seion. I ssess he effes of he eviously noed inevenion insumens on nionl elfe nd fims ofi unde iumsnes of inenionl oligooly.. Bsi model of inenionl oligooly I is uil o elin h i ely mens h fims ee he oligooly. Aoding o Augusin Couno, ho desied lssi model of oligooly in 88, i mens, h fim ojeive is o mimie ofi nd evey fim on he mke is n ouu see nd elieves h is ivl ill no esond o is on deision. The model onsides oligoolisi mke nd kes ino oun o fims on i. They oee in o diffeen ounies: H - home ouny, F - foeign ouny, nd odue homogeneous goods seel indusy o if odues. Due o he vious demnds in eh ouny, hey de. Ouu in ouny H does no ove he demnd hee. Couny H needs o e n imoe. The siuion in ouny F is oosie demnd v is me y domesi odue y nd ddiionl sok hs o e sold. Couny F is n eoe. The ssumions used in he model e folloing : i The nume of fims is fied one in eh ouny. The e is he esul of he eseh, hih s undeken ih suo fom he Euoen Commission nd he Mie Cuie Hos Felloshi.

2 ii Mginl os funion is ommon nd uve of his funion is hoionl in ode o ssue symmey. Fims e simil nd hoionl mginl os simlifies nlysis. So h, mginl os is ommon given vlue. Heffenn, Sinli, 99 iii In ode o define ounies demnd, onside he demnds s line funion, hee denoes ie in ouny H nd o denoes ie in ouny F, eesens he veil inee on he mke demnd uve, nd is he sloe of he demnd uve. v o ie ie H ouny F ouny o q v y q I E Figue : Demnd funion in ouny H nd ouny F iv In demnd funions eesses he diffeene eeen ounies <<. In his model demnd in ouny H is gee hn in ouny F model feue, so fo ll he nlysis should e gee hn.5. Aggeged old oduion of iul goods is he sum of oduion in ouny H nd ouny F nd i is equl o ggeged demnd. y v. Imo iff nd eo susidy simulneous govenmens inevenion As long s hee is only one fim in eh ouny, is ofi ill inese ouny elfe. In his se, he govenmen hs n inenive o ovide he oliy, hih suos is nionl odue. I n use de oliy insumens suh s imo iff in imoing ouny, eo susidy in eoing ouny hih e eed s de oliy ools. Mkes e segmened so h onsumes e no le o hose less eensive goods. Thee is no ie ige. Pies e diffeed y he oie insumen of he govemen inevenion.

3 A he eginning ie in ouny H is equl o ie in ouny F. Pies ill oviously hnge, hen govenmens ovide ny de oliy. When he govenmen in ouny H imoses iff fo imoed goods fom ouny F, he ie in ouny H ill inese nd ill e highe hn od y he e of he iff: Simulneously, hen he foeign govenmen imoses eo susidy, he ie in ouny F ill e highe hn in ouny H y he moun of eo susidy: o o ie H ouny quniy I I Figue : Imo iff effe ie F ouny o o v v y y quniy E E

4 4 Figue : Eo susidy effe In his se, ie funion in ouny H, hih hs een ledy ffeed y govenmens inevenions nd, is s follos: = +---+y nd ie funion in ouny F: o = ---+y. Fims ehve like in he Couno oligooly, nd hey ke eh ohes ouu s given fom he mke. Hving he equion: +y=+v nd he menioned ie funions, eion funions ould e se u: Eh fim my sele is oiml ouu levels s funion of imo iff nd eo susidy: Consideing oh ouus s funions of nd, e n susiue nd y in eh funion, hee hey eed efoe: All nlysis e imed o find elfe funion in ese o o. If ouny elfe W is defined s he sum of onsumes sulus CS, odue s ofi nd os of govenmen inevenion GR, i n e eess in he folloing y: Using he fis ode ondiion, e n se u he oiml level of. A his vlue of imo iff nionl elfe is mimied. y y o v GR CS W h h h h ¹» ¼ º «ª 6 y

5 Simil nlysis e ovided fo ouny F. Welfe funion is s follos: W f CS f f GR f ª «o v º» ¼ o > oy y@ > v v y o ¹ Aoding o he fis ode ondiion, oiml is se u: When is susiued ino he equion nd vie ves, e n illuse he Couno equiliium in he inenionl oligooly hee he govenmens ke ions. Oiml level of imo iff in ouny H nd eo susidy in ouny F e se u simulneously. I is heefoe shon h, s ell s deends on nd - he diffeene eeen ie hih demnd vnishes nd mginl os of oduion Imo iff nd eo susidy eessions sho h he min elemen h ffe hei moun seems o e he diffeen demnd ondiion. I is denoed y he vile. Conluding, i is minly he diffeene in demnd eeen ounies h deemines he level of de oliy insumens. imo iff eo susidy Figue 4: Oiml imo iff nd eo susidy s funion of diffeene in demnd As i is esened on he gh, imo iff is equl o eo susidy hen ounies e simil, h is hen =.5. Suisingly, his oin neihe o e eo : Fo ll fuhe nlysis nd omisons: -= 5

6 9. Fis signifin esuls sugges, h if hee is no diffeene eeen ounies, nd hey do no de, oiml imo iff nd eo susidy e suosed o e gee hn eo in ode o eh o minin Couno equiliium. Consequenly, if ounies do no de nd hve ==, hee is no equiliium. When =, hen i is oved h should e ge hn eo. In his se, elfe ill inese nd he ouny s n gen in he gme ill e moe sisfied. In he even h ounies eome diffeen nd keeing in mind he foh ssumion of he model, >.5, hey s de. Couny H hs go ouu defii nd in ode o mee mke demnd, i uys goods od - eomes n imoe. Imo iff s o inese fom he vlue of., no fom eo, s i ould hve een eeed see figue 4. Nionl elfe ill e mimied. Anlyil esul of he model shos h fo >.5 iff led on he imoed goods is gee hn eo susidy. We n onlude, h ie in ouny ih imo iff is gee hn ie in ouny ih eo susidy. o! Aoding o hese, hen ounies e in Couno equiliium nd hey e simil, hey need o se u eseively, n imo iff nd eo susidy gee hn eo in ode o eh mimum elfe. Hving nd s funion of, e n lule de volume. Counies ill de level deending on ho muh demnd in ouny H is gee hn hei ouu. Theefoe, imo in ouny H ill e equl o eo of ouny F. I E de Figue 5: Imo nd eo s funion of Imo I nd eo E mosly deend on. Vile in his equion is onsn nd only eesses he sloe of he uve. I n mke he ssumion h =. In his oin imon issue is ho elfe deends on imo iffs nd eo susidies? The issue is f fom hving een seled on emiil 6

7 gounds. In his model elfe funion is vey omle, using evious ssumions -= nd =, e n evlue is vlues: elfe.5 W.75 Wh.5.5 Wf Figue 6: Welfe funions I is shon, h gh is symmei ih ese o =.5. Welfe gh mks h ouny H ould gin moe nd moe fom he imo iff if only gee demnd is geneed going, u ggeged elfe s sum of elfe in ouny H nd in ouny F deeses hen gohs fom.5 o. inevenion in ouny H In his se govenmen in ouny H deides o imose imo iff he level h mimie nionl elfe. Govenmen in ouny F does no ke ny ion. In ode o oe domesi mke imo iff my oviously e se u loe level hn efoe, i mens, h if only govenmen in ouny H inevene, oeion of domesi mke is less eensive if hee is no eo susidy od. imo iff

8 Figue 7: Imo iffs s funion of o govenmens inevene, - inevenion in ouny H 6 Beuse of he mke oeion, domesi fim n odue moe. As long s no ll ouu is sold domesilly, sulus n e eoed. The heshold fo eo is = I Figue 8: Imo volume s funion of Unil vile ehes he vlue of.7675, ouny H is n eoe. This esul oms fo eling one of he evious ssumions: is imo iff in ouny H, nd is n eo susidy in ouny F. Beuse hee is no imo, is no n imo iff in his se. We onlude h s long s ounies e simil.5<<.75 nd only one of hem n ovide de oliy, h ouny ill e n eoe nd ill imose n eo susidy in ode o gin fom he de. inevenion in ouny F Le us no look iefly he effes of inevenion of he govenmen in ouny F. I offes n eo susidy fo he nionl odue

9 I is le h fim in ouny F sells moe od hn ould sell hving no ny finnil suo egding eole goods. Ho eensive fo govenmen is h suo? eo susidy Figue 8: Eo susidy s funion of o govenmens inevene, - inevenion in ouny F In his se eo susidy is less eensive oming o eo susidy h is imosed simulneously ih imo iff od only o he ie of =.697. I mens h govenmen ould like o imose eo susidy lone if only demnd is no signifinly diffeen h od. If only i is moe hn o imes smlle hn od, less eensive fo govenmen is o ovide de oliy omnying y imo iffs od. Why is i like h? This siuion is esuled fom vey smll demnd on he mke, nd onsequenly lge moun of ouu h hs o e sold od. Govenmen is oliged o give signifin funds fo eoe, h ssues eo ofile. Regding ggeged elfe old elfe s sum of elfe in ouny H nd ouny F e noied signifin diffeene. When smll ouny suo is nionl odue, hn ol elfe ill e ising fo ising. I flls in o evious ses, so i leds o he onlusion, h eo susidy my ffe ol elfe imovemen see ghs in endi.. Tde oliy effes in oligooly The suue of he segi envionmen fed y govemens is simil o he envionmen fed y oligoolisi fims Bnde, 987. The yoff o eh lye o iin deends on is on ion nd on he ion of is ivl. These yoffs migh e onsideed in ems of he ouny elfe s ell s fim ofi. We n oin ou fou ses of he inenionl duooly ih egd o de oliy: i inenionl duooly ih no govemens inevenion ii govenmen in ouny H les n imo iff 9

10 iii govenmen in ouny F suo nionl odue hough eo susidy iv govenmen H s ell s govenmen F inevenes on he mke. Keeing ssumion, h nd e fied in h model -=, e n evlue nd ome some numes h govenmens nd fims e ineesed in. They n e esened s gme of he mke lyes ehvio. Fis, e ee he gme o fo de oliy effes in elfes. Nsh equiliium F ouny no inevenion.; ;.8.44 Wh; Wf H ouny W no inevenion.7; ; he es W Figue 9: Resuls of gme in de oliy in nionl elfe, foeign elfe nd ol elfe. Pesened esuls om o he onlusion h s long s fims ehve s duooly, Nsh equiliium is lys ehed hen govenmens ke ion. Fo emle, govenmen in ouny H is no ineesed in geing id off imo iff, euse i ould deline nionl elfe fom. o.7. Couny F ould lso lose if only ndon eos omoion fom.4 o.8. fo ll nlysis ih egd o he gme yoffs, vile is fied he vlue of.75.

11 Nsh equiliium F ouny no inevenion.46;.7.89;.7 H ouny h; f no inevenion.66;.9.;. Figue : Resuls of gme in de oliy in fims ofi. Fim in ouny H is fmili ih imo, euse i eeives ofi.46 nd ould ge only.66 ihou oeion. On he ohe hnd, he ouny H lys gins, no me nionl elfe o odues ineess. Nionl elfe ihou mke oeion mouns.78 nd ises o.6 s he esul of imo iff. I lso ineses fom.6 o. if foeign govenmen imoses he eo susidy. Ho ouny F gins fom govenmen inevenion? If i imoses eo susidy nionl elfe ill e imoved fom.67 o.78, u ill deline fom.78 o.4 jus fe ouny H elies y imosing imo iff. Finlly ouny F is even in ose ondiion hn i ould e if hee ee no inevenions on he mke. The fim in ouny F lso loses. Is ofi ill ise fom. o.9 if govenmen les eo susidy, u immediely fe ouny H oeion ies, ofi ill fll o.7. So h, fim is even ose ondiion hn ould e ih no suo. Rising quesion, hehe he ounies elfes nd fims ofi e in ee ondiion hen he govenmen inevenes on he mke using oduion susidies. Will hey moe useful fo elfe imovemen? In fuhe eseh I eled he ssumion egding de oliy insumens nd hek ou he esuls of oduion susidy in inenionl oligooly. Conlusions An nlye of he Couno model oligooly in ems of he oen mke nd govenmens inevenions leds o fe onlusions. Fis esul is h Nsh equiliium on he mke kes le hen govenmens inevene. The min elemen in his finding is h govenmens hve ess o ools, suh s iff o susidy, hih he fims do no hve. So h, no only fims y o dee ivls y mke ineion. Eh govenmen ovides is de oliy lso eognies he segi ossiiliies in he inenionl oligooly. These oliies n led o nionl dvnge. As fuhe eseh shoed, i is no even imon if hey imose de oliy insumens o susidy oduion. The only diffeene is h in he seond se, ounies do no de, euse ll domesi

12 demnd is me y domesi ouu. Pie on he mke is equl o mginl os feue of efely omeiive soluion, u suisingly, fims sill ehve like duooly nd hey e king hei deisions segilly. Due o Nsh equiliium, he inevenion sge is esonle fom he oin of vie onsumes, nd fims s ell. Ne imon onlusion is he f h lge ouny gins lo fom is govenmen iviy. When govenmen in ouny H les de oliy insumen o oduion susidy, he elfe imovemen nd ofi inese ee signifinly igge hn esuls of he sme oliy in ouny F. Smll ouny lys lose no me if is govenmen oes he mke o susidies n eo. The jum fom noninevenion sne o inevenion n imove elfe in smll ouny only if govenmen in he ohe ouny do no e. Unless i is ind y ny inenionl geemen, h sne is no sle. In hese iumsnes, ivl ill lys hs n inenive o s is ion. Consequenly he finl esul fo he smll ouny is muh ose hn i did no ke ny ion. In smll oen eonomy, no ye of de inevenion n e fis-es Ney, 99. We n ovide some emiil ove fo his onlusion. Fis is he oliy of he Wold Tde Ogniion. This insiuion ies o ssue fee de nd e fo mny emks of he inevenionism. Bu s old mke shos, i is eemely diffiul, euse, s i s menioned efoe, ounies hve go mny inenives o inevene eseilly hei nionl odues hen hey omee od s of he inenionl oligooly. Reenly suh siuion ook le in if indusy in Cnd nd Bil, Govenmens suoed hei on nionl odues of if Bomdie nd Eme, hih ee omeing fo eo ons. Anohe emle onens o smll ounies. Inenionl geemens n le o imose eo susidy. I ill ffe elfe imovemen nd ofi inese in smll ouny, u s soon s lge ouny e y imosing ny ies, ll gins of smll ouny ill dise nd finlly i ill e he os ondiion. In ll onened ses neihe ny fim no govenmen is eeed snding ssively y hing he ivl s segi ehvio s long s ll of hem e lying on he oligoolisi mke. They ill e segilly eing ouu nd ie of he ivl s given. Eh govenmen is involved in inenionl de omeiion. I seems o e ovious in ems of he inenionl oligoolisi mke, hen evey fim omes fom diffeen ouny. Thn govenmens migh offe suo fo is domesi fim in ode o imove is inenionl omeiiveness nd onsequenly imove nionl elfe. The olem fed y govenmen is o hoose oie ime of eion on ivl s deision nd oiml level of he oliy insumen. No me if i is eo susidy o imo iff, he diffiuly of hoosing hem in elfe o ofi-shifing one hve suue of gme. And his is n inenionl gme, hih e govenmens involved in. An eo susidy o imo iff hosen he oiml level in one ouny foes ohes o.

13 Refeenes Bnde, J. A., Rionles fo segi de nd indusil oliy, in: Segi de oliy nd he ne inenionl eonomis, ed: Kugmn, P. R., MIT Pess, Cmidge, 987, Bnde, J. A., Sene, B. J., Eo susidies nd inenionl she ivly, NBER oking e 464, Seeme 984. Gossmn, G. M., Helmn, E., Goh nd elfe in smll oen eonomy, in: Inenionl de nd de oliy, ed: Helmn E., Rin A., MIT Pess, Cmidge, 99. Heffenn, S., Sinli, P., Moden inenionl eonomis, Bsil Blkell Ld, Cmidge, 99. Ney, P., Eo susidies nd Pie Comeiion, in: Inenionl de nd de oliy, ed: Helmn E., Rin A., MIT Pess, Cmidge, 99, Pngiy, A., Evluing he se fo eo susidies, Wold Bnk okgou e, 9 Mh 999. Rodik, D., Tking de oliy seiously: eo susidiion s se sudy in oliy effeiveness, NBER oking e 4567, Deeme 99.