Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 141: Uniform Subsidy Reductions in International Oligopoly

Rickard Sandin
Additional contact information
Rickard Sandin: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden

Abstract: This paper studies the effect of production subsidies used as strategic instruments by two rivalling countries whose firms differ in production efficiency. In particular, it examines the welfare effects of a uniform subsidy reduction from the Cournot-Nash equilibrium under different assumptions regarding technology and taste. It is found that the net exporter (usually the efficient country) gains while the net importer (usually the inefficient country) loses from a uniform subsidy reduction. Results show that a non-linear demand function or marginal cost functions with different slopes across countries is necessary to obtain an increase in total welfare.

Keywords: Cournot oligopoly; heterogeneous countries; production subsidies

JEL-codes: D43; F12; H20; L13

21 pages, December 1996

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