Publication at Faculty of Social Sciences, Faculty of Mathematics and Physics, Centre for Economic Research and Graduate Education |
2010
Abstract
We analyse a simple 'tariffs cum foreign competition' policy targeted at enhancing the competitive position of a domestic, developing country firm that competes with its developed country counterpart on the domestic market and that carries out an innovative (or imitative) effort. We evaluate this policy with respect to social welfare, type of oligopoly conduct, information requirement, time consistency and possibility of manipulative behaviour and conclude that the most robust policy setup is one in which the domestic government is unable to pre-commit to the level of its policy.
We also study how the unit cost heterogeneity of the domestic firm affects trade protection.