Economic effects of strategic trade policy: Focused on the distribution of firms in the 3rd country market

Abstract

This paper examines the welfare effect of strategic trade policy where firms enter the 3rd country market. The main results are asfollows. First, for the case where the number of country 1’s firm is one more than that of country 2’s, government 1 chooses no subsidy and government 2 adopts subsidy. In this equilibrium, the country 1’s welfare decreases and country 2’s welfare increases relative to the initial state. Second, for the situation where the number of country 1’s firms is higher than the country 2’s by more than 1, the government 1 adopts tax and government 2 adopts subsidy. And the welfare of country 1 goes down and that of country 2 rises in this equilibrium compared to the initial state. In this case, the government 1’s policy intervention raises the welfare of the country 2, regardless of whether the government 2 intervenes or not.