Choice of Strategic Industry-Protecting Policies Amidst Uncertainty in Demand and Supply: A Multi-Stage Game Model

Abstract

It has been shown how trade policy can be strategically chosen while demand uncertainty significantly arises for the exporting market. As an extension, we will show how industry-protecting policy can be strategically chosen while uncertainty arises in both demand and supply. In summary, demand uncertainty is important to determine trade policy while supply uncertainty important to industry-protecting policy. Some countries enact an industry-protecting policy of either subsidy or price control despite arguments about inefficiency. This paper aims to explore which policy can be strategically chosen. To do so, we will use a multi-stage game model. One finding is that subsidy is clearly better when supply uncertainty is significant. This is largely because subsidy induces domestic firms to internalize the supply uncertainty. When demand uncertainty is significant, the number of firms and the elasticity, of demand and supply, should be taken into account when making a choice. This paper contributes to the body of knowledge in terms of industrial policy and strategic choice.