Strategic Trade Policy: How Important is the International Constraint? The Case of Optimal Tariff When Technological Innovations Spill Over to the Foreign Competitor

In this paper we discuss the incentives of a welfare maximizing government to implement strategic trade policy when, on the one hand, there is uncertainty about the relevant market information (like the type of competition, demand function, cost function, etc.), but, on the other hand, the environment of the contest between the firms is specific: there are two firms and the interaction among them is accompanied by technological spillovers from the domestic firm to the foreign firm. The two bench mark oligopoly models, Bertrand and Cournot, are assumed to be possible types of market competition. In order to analyse the problem of strategic policy under uncertainty, it is first necessary to work out in depth the optimal tariff policy in perfect information set-up for both the Cournot and the Bertrand case. We argue that the ‘informational’ criticism of strategic trade policy is less relevant than was previously thought.