Export-Share Requirements vs. Production Taxes under Duopoly with Differentiated Products: A Conjecture Variational Approach

Abstract

One commonly held belief, as shared by some trade theorists, suggests that trade policy is inferior to domestic industrial policy as an interventionist device. This paper compares the output level on domestic market between production taxes and export-share requirements. Two firms, one domestic and one foreign/export firm, compete in a domestic market where products are imperfect substitutes of each other, while the foreign/export firm also suppl ies a portion of its output to foreign market. When tax rate is positive and conjecture variation is centered around Cournot, domestic output under export-share requirements will be higher than under production taxes. The values of conjecture variation that are centered around Cournot are bounded within an open interval, with its upper and lower bound determined by four factors: tax rate and export share, domestic output of firms under the tax regime, and the degree of product substitution.