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Optimal trade policy and welfare in a differentiated duopoly

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  • Junlong Chen
  • Xinran Xie
  • Chaoqun Sun
  • Li Lin
  • Jiali Liu

Abstract

This study considers a differentiated duopoly, including domestic and foreign enterprises, in trade, analyzes the impacts of product differentiation and productivity variance on equilibrium results, and explores the optimal trade policy in different competition modes. We find that differentiated products can boost the supply of foreign enterprises in a Cournot competition. In a home‐leading Stackelberg duopoly, increasing tariffs decreases consumer surplus but improves the home country's social welfare. The optimum‐welfare tariff of a home‐leading Stackelberg duopoly cannot exceed that of the foreign‐leading Stackelberg duopoly. An easy or tight tariff policy can be optimal, depending on the parameters and duopoly modes.

Suggested Citation

  • Junlong Chen & Xinran Xie & Chaoqun Sun & Li Lin & Jiali Liu, 2022. "Optimal trade policy and welfare in a differentiated duopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(7), pages 3019-3043, October.
    • Handle: RePEc:wly:mgtdec:v:43:y:2022:i:7:p:3019-3043
    DOI: 10.1002/mde.3579
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