Existence of trading Nash equilibrium in tariff retaliation models

Abstract

The paper considers a tariff retaliation model in which two countries set tariffs strategically in an exchange economy. In the classes of homothetic and quasi-linear preferences, I find conditions that guarantee existence of a trading Nash equilibrium. These conditions imply that the offer curves of the countries are convex to the origin, and thus, the best response function of each country is continuous. An example is also constructed to show that a trading Nash equilibrium may not exist in general.