Industry concentration and strategic trade policy in successive oligopoly

Abstract

We study a policy game between exporting and importing countries in vertically linked industries. In a successive international Cournot oligopoly, we let the governments in the importing and exporting countries use tax instruments strategically to shift rents up or down the vertical value-chain. We show that the equilibrium outcome depends crucially on the relative degree of competitiveness in the upstream and downstream parts of the industry. With respect to national welfare, a more competitive upstream industry may benefit an exporting (upstream) country while harming an importing (downstream) country. On the other hand, a more competitive downstream industry may harm exporting countries.