Strategic Trade: Weighted Payoff Functions And Diverse Trade Patterns

Abstract

This paper extends the basic intra-industry trade model, Brander and Spencer (1985), in two directions. A weight is included in the foreign government’s payoff function, similar to Collie (1997), which alters the traditional policy choice when this weight is different than one. We also require each firm’s output choice be nonnegative. These constraints and the weighted payoff function lead to several Nash equilibria that have not been analyzed in the intra-industry trade literature. Our analysis helps explain why industries satisfying the necessary conditions for intra-industry trade patterns may not actually display such trade patterns. [F12, F13, C72]