Wednesday, May 18, 2011
Posted by D. Daniel Sokol
Makoto Yano, Keio University - Department of Economics and Takakazu Honryo, Columbia University - Columbia Business School - Economics Department theorize about A Two-Country Game of Competition Policies.
ABSTRACT: Recently a number of studies have recognized that trade policy can be substituted for by competition policy. This study demonstrates, however, that there is a fundamental difference in the working of terms-of-trade effects between competition policy and tariff policy and that if countries optimally set their respective competition policies, it is unlikely to result in a tariff-war-like state in which all countries adopt distortionary policies. Instead, in a Nash equilibrium, one country maintains perfect competition in its domestic service sector while the other country tolerates imperfect competition.