Three essays in imperfect competition, political economy
and international trade
University of Southampton, School of Social Sociences,
This Thesis has two themes: (1) political economy of international trade and factor mobility
policy; (2) the robustness of strategic trade and industrial policy.
Chapter 1 is a non-technical introduction of my research.
In Chapter 2, Double-edged incentive competition for FDI, we study the impact of
special interest lobbying on competition between two countries for a multinational in a
common agency framework. \Ve address the following questions. On the positive side, is
special interest lobbying a determinant of competition for FDI? If so, how does it work?
How does it affect the equilibrium price for attracting FDI? On the normative side, what
are the welfare effects of FDI competition when special interest lobbying is present? Is
allocative efficiency always achieved? We argue that special interest lobbying provides an
extra political incentive for a government to attract FDI. We show that compared to the
benchmark case when governments maximize national welfare, now (1) an economically
disadvantageous country has a chance to win the competition; (2) the equilibrium price
for attracting FDI is higher than in the benchmark case; (3) allocative efficiency cannot
be always achieved.
In Chapter 3, Advertising in a differentiated duopoly and its policy implications for
an open economy, we develop a model of advertising in a differentiated duopoly in which
firms first decide how much to invest in cooperative or predatory advertising and then
engage in product market competition (Cournot or Bertrand). We then use this model,
with the type of advertising endogenously determined, to explore the policy implications
in the context of a Brander-Spencer third-country model of strategic trade. Among results
derived from this model, most interestingly we show that for a range of parameter values
we get robust trade policy in which governments always use a trade subsidy irrespective
of the type of advertising or form of market competition.
In Chapter 4, Is export subsidy a robust trade policy recommendation towards a
unionized duopoly, we argue that although previous researches imply that the robust trade
policy recommendation towards a unionized duopoly is an export subsidy, we cannot get
such a result even in the linear case if the opportunity cost of public funds is sufficiently
high. However, if we consider the case where the domestic firm and the trade union lobby
the government to set their favorable trade policies by giving the government political
contributions (modeled in a common agency setting), then the result of robustness will be
restored if the government cares about the political contributions sufficiently relative to
See Chapter 5 for some technical proofs.
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