Export Subsidies, Entry Deterrence and Countervailing Tariffs.

In this Cournot oligopoly model, a number of incumbent foreign firms face the potential entry of domestic firms. When there is no retaliation by the domestic country, the optimal foreign policy is to subsidize exports so that no domestic firms will enter the industry and the foreign firms capture the entire market. However, when the domestic country can retaliate with a countervailing tariff, then the optimal foreign export subsidy is zero. When the domestic country retaliates with a tariff and a production subsidy, then the optimal foreign export subsidy may be positive. Copyright 1992 by Blackwell Publishers Ltd and The Victoria University of Manchester