Network externalities, strategic delegation and optimal trade policy

Abstract

This paper examines strategic trade policy for differentiated network-goods oligopolies under alternative scenarios when there is export-rivalry between two countries. We demonstrate that, in the absence of managerial delegation, the optimal trade policy entails an export tax (subsidy) if network externalities are weak (strong). However, when price competition is combined with managerial delegation, the opposite is true. Subsidizing exports, on the other hand, is always optimal under quantity competition. We also show that the welfare consequences of strategic trade policy depend not only on the mode of product market competition, but also on firms’ internal organizations and the strength of network externalities.