Strategic Trade Policy in Reciprocal Dumping Model with Incomplete Information

Abstract

This paper extends the conventional literature on strategic trade policy in reciprocal dumping model to the context that involves market demand uncertainty and incomplete information. In order to highlight the role of uncertainty and incomplete information, a simple scenario with linear asymmetric demand, additive stochastic market shock, homogeneous products, and identical constant marginal costs are considered. It is shown that incomplete information at industrial level redistributes the option value associated with better information to the country with the better informed firm. As a result, both governments tend to choose tariffs over export subsidies in the Nash equilibrium of the simultaneous strategic trade policy games under complete and incomplete information. This yields a second best outcome. Moreover, we show that Nash equilibrium outcome is inferior to free-trade outcome.