Reciprocal Dumping Research Articles

Reciprocal Dumping under Dichotomous Regulation

An essential ingredient to net-zero-emissions policies is to regionally integrate electricity markets. But electricity cross-border trades are often assessed as inefficient. We explain this inefficiency by the presence of a dichotomous regulation: producers are highly regulated with regard to their local activities, but weakly regulated when it comes to their exports. Such a dichotomy in regulation can be generalized to every economic sector, with varying intensity. We develop a generic 2-player 2-stage game theoretical framework where producers anticipate the impact of their exports on the clearing of regulated local markets. We characterize the subgame-perfect Nash equilibrium of the game as a function of the relative price-elasticity between markets. Overall, dichotomous regulation leads producers to over-export in order to create scarcity in their home market. Hence, despite that local markets clear efficiently, the global equilibrium is inefficient. When the two jurisdictions are relatively symmetric, the equilibrium is Pareto-dominated by the first-best outcome. These results call for better coordination between regulators across different jurisdictions.

The scope for strategic asymmetry under international rivalry

In the context of a model of international trade through reciprocal dumping with horizontally differentiated goods, we study the endogenous choice of quantities and prices as strategic variables. We show that while a Cournot outcome prevails under conditions of export rivalry, strategic asymmetry under foreign direct investment rivalry may be observed, especially when it is possible to initially deter FDI by committing to a price contract, and when switching is costly and/or takes time.

Technology, market structure and the gains from trade

We study the gains from trade in a model with oligopolistic competition, heterogeneous firms and innovation. Our key finding is that a trade-induced increase in market concentration can be an important source of the gains from trade. Foreign competition puts downward pressure on profitability which reduces the equilibrium number of firms, but increases their size. This rise in concentration increases welfare via two channels: increasing returns in production, and a scale effect on innovation. In a calibrated version of the model we show that concentration is a main driver of the gains from trade, mostly via its stimulating effect on innovation – the contribution of increasing returns is small. Moreover, lowering trade costs reduce the inefficiency produced by “reciprocal dumping”, leading to substantial gains. In contrast, the associated reduction in markup dispersion has only a negligible effect.

International trade, differentiated goods, and strategic asymmetry

AbstractWe scrutinize international trade arising from oligopolistic rivalry (reciprocal dumping) in a model where the goods are horizontally differentiated and where otherwise symmetric firms located in different regions adopt asymmetric strategies—one competing in prices and the other competing in quantities. Unidirectional and intra‐industry trade appear endogenously in our framework. We show that as trade costs decline the equilibrium outcome will transition from autarky through a region of unidirectional trade, before intra‐industry trade ultimately arises. In the unidirectional trade region, potential market entry by the rival has an impact on firm behavior even though the rival is not exporting. The implications of product differentiation and changing trade costs for trade volumes and for the gains from trade are asymmetric in general. Welfare may rise monotonically as trade costs fall for one of the economies, but will necessarily fall initially relative to autarky for the other.

Strategic pollution control under free trade

This paper designs a reciprocal dumping model to address the control of industrial pollution between two trading partners. Firms generate transboundary pollution from production and environmental taxes represent the pollution control instrument. We ask whether environmental taxes implemented in a non-cooperative setting are more stringent than the globally efficient level. Relative to the globally efficient case, we find in the linear Markov Perfect Nash Equilibrium (MPNE) context that the tax rate for both countries is smaller and individual emissions are larger. However, these results may not hold in the non-linear MPNE case depending on market structure and environmental conditions. Unlike the symmetric equilibrium case, the tax rates are always discontinuous under asymmetric MPNEs. The asymmetric equilibrium scenario can give rise to higher individual payoffs relative to the symmetric equilibrium case.

Technology, Market Structure and the Gains from Trade

We study the gains from trade in a model with oligopolistic competition, heterogeneous firms and innovation, and provide a formula to decompose the mechanism. The new insight we provide is that market concentration can be a welfare-relevant feature of market power above and beyond markup dispersion. Trade liberalisation increases foreign competition and reduces the number of active firms in the market, thereby increasing concentration. A more concentrated economy is more efficient due to increasing returns in production. Moreover, higher concentration produces a scale effect on firms’ incentives to innovate, which increases welfare via productivity improvements. In the calibrated version of the model we show that a trade-induced increase in concentration contributes substantially to the gains from trade, mostly via its stimulating effect on innovation. Sizeable gains also come from the reduction of the inefficiency produced by trade in identical goods; i.e. through a reduction in reciprocal dumping. Changes in markup dispersion, in contrast, have only negligible effects.

Trade and commodity taxes as environmental instruments in an open economy

PurposeIn a simple reciprocal dumping model of trade, this study scrutinizes the strategic role of trade and commodity taxes as environmental instruments when consumption of an imported product generates pollution. The results suggest that for sufficiently small values of the marginal disutility from pollution, commodity taxes can be preferred over import tariffs, and compared to the case of trade policies, free trade can be welfare dominating even for higher values of the marginal disutility from pollution when commodity taxes are used strategically as environmental instruments.Design/methodology/approachThe authors employ a reciprocal dumping model of trade.FindingsA sufficiently high marginal disutility from pollution (or sufficient asymmetries between the countries in terms of their marginal disutility from pollution) may jeopardize bilateral trade, especially if countries are given the option to set tariffs freely for imported goods (consumption of which generate environmental pollution). For sufficiently weak transboundary pollution and sufficiently low marginal disutility from pollution, (1) both Nash trade and domestic policies may prove to be helpful in addressing consumption-based pollution, and (2) it is possible to show in such a case that Nash domestic policies may be preferred over Nash trade policies, especially when both transboundary pollution and the trading partner's marginal disutility from pollution are sufficiently low.Originality/valueThe novel contribution of this paper is (1) to capture asymmetries among trading partners in terms of how much they account for environmental pollution when deciding on their (domestic/trade) policy measures and (2) to focus on environmental degradation that is caused by final consumption of a product imported from a trading partner.

Strategic Trade Policy in Reciprocal Dumping Model with Incomplete Information

This paper extends the conventional literature on strategic trade policy in reciprocal dumping model to the context that involves market demand uncertainty and incomplete information. In order to highlight the role of uncertainty and incomplete information, a simple scenario with linear asymmetric demand, additive stochastic market shock, homogeneous products, and identical constant marginal costs are considered. It is shown that incomplete information at industrial level redistributes the option value associated with better information to the country with the better informed firm. As a result, both governments tend to choose tariffs over export subsidies in the Nash equilibrium of the simultaneous strategic trade policy games under complete and incomplete information. This yields a second best outcome. Moreover, we show that Nash equilibrium outcome is inferior to free-trade outcome.

Optimal Reciprocal Dumping in a Managed Trade Regime

The purpose of this article is to examine the strategic relationship between trade policy in a managed protection regime and commercial exchange at prices below normal value. It presents a three-stage model of imperfect competition that incorporates the possibility for the government authority to influence the production decisions of companies through a credible threat, by means of a specific tariff. This methodology—in a context of segmented markets, Cournot conjectures, and the application of an optimal tariff—generates a mechanism of incentives (which are not sufficient from a social welfare perspective) for domestic and foreign companies to practice reciprocal dumping. A general conclusion is that a free trade policy would be counterproductive, since it would eliminate the incentives that domestic and foreign companies would have to carry out the commercial exchange that would diminish the loss of welfare associated with the existence of monopolies in both markets.

Cross-border pollution in an asymmetric trade competition

The present study develops a reciprocal dumping model between two different-sized countries, each with a monopolist company in a homogenous good market operating under conditions of cross-border pollution. Two environmental regulation instruments will be used: pollution quotas and compensatory tariffs. The optimal values of said variables will be determined, while the strategic environmental policies derived from said optimal values will be deduced. The mainly result show that if the disutility of polluting is significantly high in relation to the abatement cost, then governments impose severe controls through environmental policy, such as a zero pollution quota on companies or even an onerous compensatory tariff.

Cross-border pollution in an asymmetric trade competition

The present study develops a reciprocal dumping model between two different-sized countries, each with a monopolist company in a homogenous good market operating under conditions of cross-border pollution. Two environmental regulation instruments will be used: pollution quotas and compensatory tariffs. The optimal values of said variables will be determined, while the strategic environmental policies derived from said optimal values will be deduced. The mainly result show that if the disutility of polluting is significantly high in relation to the abatement cost, then governments impose severe controls through environmental policy, such as a zero pollution quota on companies or even an onerous compensatory tariff.

Intra-industry trade in differentiated and homogenous commodities: Brander and Krugman models unified

Research background: This paper extends the early papers by Brander (1981) and Brander and Krugman (1983) who used a simple partial equilibrium Cournot duopoly to a full general equilibrium setting. The explanations of intra-industry trade can be based either on oligopolistic reciprocal dumping idea (Brander, 1981) or product differentiation (Dixit and Norman, 1980; Krugman, 1979, 1980, 1981; Lancaster, 1980; Helpman, 1981). In this paper we combine both explanations in a unified general equilibrium model.
 Purpose of the article: We develop a two-sector, one-factor general equilibrium model, in which the first sector produces a differentiated good under monopolistic competition and the second sector produces a homogenous good under Cournot oligopolistic competition. In this paper, we study how competition between domestic and foreign firms resulting from trade liberalization affects intra-industry trade in both sectors.
 Methods: The paper develops a two-sector model based on several assumptions. Consumers have a two-tier utility function of the Cobb-Douglas-Spence-Dixit-Stiglitz form. Firms operate in two sectors and produce goods under increasing returns to scale resulting from the existence of fixed costs. One sector produces homogenous good under Cournot competition, and the second one produces a differentiated product in under Chamberlinian monopolistic competition. Free entry is assumed in both sectors. Labor is assumed to be the only factor of production with perfect mobility and full employment.
 Findings & Value added: In contrast to previous papers, our study is based on a full general equilibrium Cournot oligopoly framework with many firms. Moreover, we endogenize the number of firms and study the resulting trading equilibria. Therefore, this paper can be regarded as the extension and unification of the early papers by Brander (1981), Brander and Krugman (1983) and Krugman (1979, 1980).

RECIPROCAL DUMPING AND ENVIRONMENTAL POLICES

In a reciprocal dumping model of trade we analyse the effect of environmental policy reform on welfare in the presence of unemployment and repatriated profits. Pollution quota, used by the government in each country, restricts the local production and reduces the social harmful pollution. However, this quota is a barrier of trade which inhibits the employment and consumers surplus benefit. Bearing in mind this, both countries agree an infinitesimal and proportionate uniform reduction in pollution quota. In both cases global welfare will increase if marginal disutility of pollution is larger than the cost for abating pollution. The effect on each country will depend on the market size and marginal technological costs. Under the same conditions, when both countries agree harmonisation in pollution quotas the global welfare increase but the effect on the welfare of each country will be different.

RECIPROCAL DUMPING AND ENVIRONMENTAL TAXES

This paper calculates the optimal tax of the emission of polluting agents in oligopolistic possess and under conditions of the reciprocal dumping, in which the firms count on the appropriate technology to decrease the pollution and can decide the amount of emissions generated. In this model the optimal tax mainly depends on the amount of the marginal disutility to pollute, as well as the abatement cost.

ANTIDUMPING, INTRA‐INDUSTRY TRADE, AND QUALITY REVERSALS

We examine an export game where two (home and foreign) firms produce vertically differentiated products. The foreign firm is more R&D efficient and is based in a larger and richer market. The unique (risk‐dominant) Nash equilibrium exhibits intra‐industry trade, and the foreign producer manufactures a higher‐quality product. When transport costs are low, unilateral dumping by the foreign firm arises; otherwise, reciprocal dumping occurs. For some parameters, a domestic antidumping policy leads to a quality reversal in the international market whereby the home firm becomes the quality leader. This policy is desirable for the implementing country, though world welfare decreases.

The choice of commodity tax base in the presence of horizontal foreign direct investment

We analyse the choice of commodity tax base, when countries set their taxes non-cooperatively in a reciprocal dumping model of homogeneous goods trade with horizontal foreign direct investment (FDI). We show that the consumption base (destination principle) weakly welfare-dominates the production base (origin principle) for a large range of plant fixed costs. When integration is complete, the destination principle dominates the origin principle for all levels of plant fixed costs below which FDI occurs under the origin principle. This contrasts with much of the existing literature which has tended to support the origin principle under imperfect competition with a fixed market structure.

Together at Last: Trade Costs, Demand Structure, and Welfare

We show that relaxing the assumption of CES preferences in monopolistic competition has surprising implications when trade is restricted. Integrated and segmented markets behave differently, the latter typically exhibiting reciprocal dumping. Globalization and lower trade costs have different effects. The former reduces spending on all existing varieties, the latter switches spending from home to imported varieties; when demands are less convex than CES, globalization raises whereas lower trade costs reduce firm output. Finally, calibrating gains from trade is harder. Many more parameters are needed, while import demand elasticities typically overestimate the true elasticities, and so underestimate the gains from trade.

Product market integration and wage bargaining institutions

This paper studies the effects of product market integration on wage bargaining institutions. By considering an international Cournot–Nash oligopoly with unionised home firms and non-unionised foreign firms producing substitute goods, the paper shows that the relative size of the home and foreign markets matters for the effects of a bilateral reduction in trade barriers. If the home market size is relatively larger than the foreign market size, a reduction in trade barriers, by lowering the sharable surplus for home firms and unions in the global market, gives unions incentives to choose more decentralised wage bargaining institutions. This industry-level mechanism, however, works in the opposite direction when the foreign market size is sufficiently large, including the “reciprocal dumping” symmetric market size model. In this case, cutting trade barriers raises the global sharable surplus and encourages domestic wage-setters to choose more centralised institutions.

Pollution and Commerce Control between Emerging Countries

This work presents a mathematical model for reciprocal dumping and transboundary pollution, under a setting of oligopolistic competition. To control emissions, governments can establish two environmental regulation instruments: quotas and taxes. To do so, they calculate the optimal values for these variables and implement environmental policies, which aim to maximize the welfare function for both consumers and manufacturing companies and improve tax revenue and the social cost of polluting. With this model, we are able to conclude that when the social cost of polluting is high, governments should impose a quota for the level of pollution or a tax for contaminating. However, if the cost to abate pollution is high, the government may increase the pollution quota or reduce the tax.

Production Cost Asymmetry, Minimum Access and Reciprocal Dumping

In this article we propose a bilateral dumping model in which the minimum access level is endogenous. Regions compete with one another using Cournot conjectures and engage in interregional dumping as in Brander and Krugman’s (1983) reciprocal dumping model. International trade is hindered by restrictive Tariff rate Quota (TRQs). The model features two regions and one product. We derive the conditions under which it is optimal to observe interregional trade and those under which trade does not exist. The results show that the world price and the difference in production costs between regions play an important role in determining whether bilateral trade exists. In the presence of bilateral trade, the region with the largest market size will obtain the largest share of import volumes permitted under the minimum access system while in the absence of interregional trade, the distribution of import permits between regions will also depends on the product cost asymmetry. When only the most efficient region exports to the least efficient region, production costs asymmetry, transaction costs and world price level determine whether the smaller or larger region obtains the larger share of product import allowed under minimum access commitment. In all cases, we show that in a country like Canada, creation of “artificial barriers” to interprovincial trade of products under supply management system lowers the welfare of at least one of the regions, along with the global welfare.