Strategic Trade Policy in General Oligopolistic Equilibrium

Abstract

This paper studies how cross-sector strategic trade policy affects wages, country-wide profits, and welfare. I develop a simple model of two-country continuum-of-sectors general oligopolistic equilibrium. Demands are linear and sectors involve one domestic firm competing on quantity with its foreign rival, producing a homogeneous good within a home-market framework. Firms have constant marginal costs in using the unique production factor. Unit labor requirements differ across sectors but are common within sectors. Countries face resource constraints, so that foreign and domestic wages are simultaneously determined. Before firms compete, only domestic government can set trade policy. Respect to free trade, cross-sector protectionism damages foreign wage whereas it does not affect domestic wage. Except for the special case where sectors share the same technology, domestic country-wide profits benefit from small import tariffs whereas foreign counterpart is hit. Consequences on income distributions are derived. Domestic social welfare is unambiguously penalized, suggesting political-economy implications.