Optimal Trade and Industrial Policy Under Oligopoly

Jonathan Eaton, Gene M. Grossman

NBER Working Paper No. 1236 (Also Reprint No. r0724)
Issued in November 1983
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

In this paper we provide an integrative treatment of the welfare effects of trade and industrial policy under oligopoly, and characterize qualitatively the form that optimal intervention takes under a variety of assumptions about the number of firms, their conjectures about the response of their rivals to their actions, the substitutability of their productsand the markets in which they are sold. We find that when no domestic consumption occurs optimal policy under duopoly with a single home firm depends on the difference between firms' actual responses to their rivals and the response that their rivals' conjecture. If conjectures are consistent ,free trade is optimal. A tax or subsidy is indicated depending on the sign of the difference between the conjectured and the actual reponse.With more than one home firm but still no domestic consumption, an export tax is indicated if conjectures are consistent. Production subsidies and export tax-cum-subsidies can raise national welfare in the presence of domestic consumption, because these policies can mitigate the extent of the consumption distortion implicit in the deviation of price from marginal cost.

download in pdf format
   (275 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1236

Published: Eaton, Jonathan and Gene M. Grossman. "Optimal Trade and Industrial Policy Under Oligopoly." Quarterly Journal of Economics, Vol. 101, No. 2, (May 1986), pp. 383-406. citation courtesy of

Users who downloaded this paper also downloaded* these:
Brander w5020 Strategic Trade Policy
Rodriguez and Rodrik Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence
Brander and Spencer w1464 Export Subsidies and International Market Share Rivalry
Dixit and Grossman w1344 Targeted Export Promotion with Several Oligopolistic Industries
Brander and Spencer w1193 Trade Warfare: Tariffs and Cartels
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us