Strategic Trade Policy on Oligopolistic Markets

Abstract

Trade policy has been a popular field of economists’ interests since Brander and Spencer works were published in 1985. In the presence of strengthening competition on international markets, many governments are interested in supporting their chosen industries. The most profitable support is connected with oligopolistic markets. If a domestic firm is a part of an international oligopoly and receives any kind of support from its own government, it competes successfully on the market. Due to the public financing (or any other external funding), the firm may reduce its costs or any other expenditures and increase profits. Pivotal issue to emphasize is that concurrently with the improvement of the situation of a particular firm, there is no significant increase of the price of product, but there is a substantial improvement in terms of the national welfare. Many economists pointed out the role of government’s subsidies regarding the strategic trade policy in case of the international oligopolies. This paper presents some theoretical background for consideration of profitability of subsidies and their justification on the oligopolistic market. It concerns two models: Branders (1995) – third market model with export production subsidies and Bagwell and Staiger (1994), who refer to the R&D subsidies. Because of WTO restrictions concerning direct export subsidies, many of the theoretical models refer to the R&D subsidies, which are not banned. The main purpose of this paper is to show theoretical assumptions of a motivation for implementing subsidies for domestic firm being a part of an international oligopoly. I will present figures showing the level of the R&D subsidisation in the EU-countries as well as in the countries joining the European Union in the next future. On the basis of some empirical data I will prove the thesis that government activity in the field of export support would help in achieving a dominant position on the international oligopoly and ameliorate the economic situation of the country because of the export trigger and national welfare improvement.