Cournot-Bertrand Competition: A Revisit of Strategic Trade Policy in the Third-Market Model

Abstract

Purpose-Using Cournot-Bertrand duopoly models and incorporating the results of Brander and Spencer (1985) as well as Eaton and Grossman (1986), we arrive at a general, simple rule to determine the optimal policy of the home government for any combination of strategic variables: regardless of the strategic variable of the domestic firm, the optimal policy of the home country is an export subsidy (tax) as long as the foreign firm’s strategic variable is output (price). Design/methodology/approach-The optimal subsidy or tax of the home country is shown to move the equilibrium to the Stackelberg equilibrium where the domestic firm behaves as the leader while the foreign firm behaves as a follower under free trade. Findings-With appropriate interpretations and a suitable caveat, the above results still hold in the case with multiple foreign firms which may choose different strategic variables. Originality/value-With appropriate interpretations and a suitable caveat, the above results still hold in the case with multiple foreign firms which may choose different strategic variables.