Strategic Trade Policy With Endogenous Product Differentiation
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Strategic Trade Policy with Endogenous Product Differentiation
Author | : Andreas Hoefele |
Publisher | : |
Total Pages | : 0 |
Release | : 2010 |
Genre | : |
ISBN | : |
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In this paper I develop a model of international duopoly, where firms invest in product differentiation. I show that firms have an incentive to free-ride on the investment of their rival, due to an externality generated by product differentiation. A further effect of product differentiation is the market-expansion effect, which induces consumers to increase their aggregate spending in the market. Depending on the strength of the two effects, the investments are either strategic substitutes or strategic complements. I link this result to strategic trade policy and show that the optimal policy depends on the strength of the market-expansion effect.
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