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International trade policy, oligopoly and learning-by-doing (with applications to the international aircraft industry) Fok, Andy K.

Abstract

Despite the non-cooperative outcome predicted by the model of Prisoner Dilemma, throughout the history of international trade, mutual conflicts leading to an equilibrium which has the lowest joint payoffs is not so frequently observed. Trade barriers have indeed been gradually removed since the end of World War II. The objective of this thesis is to investigate various policy implications for international trade under duopoly with learning effects and to examine under what assumptions of strategy adopted by the rival will result in trade disputes. Interestingly, the adoption of a "tit-for-tat" strategy can be claimed by a government to achieve free trade. In this paper, four major results are obtained. All theoretical results involve a duopolistic industry in which two firms, belonging to two different countries, attempt to export a homogeneous good to a third market. Assuming a Cournot game for competition at the firm level, and a "tit-for-tat” strategy adopted by the rival, the first result indicate that the presence of learning effects render cooperation (removal of subsidies) between governments difficult to achieve. The second result shows that in a dynamic economy with infinite horizons in which a government only plans for two periods, a policy of unconditional free trade cannot provide sufficient penalties because the gains from going down the learning curve through production subsidies outweighs the losses from retaliation. The third objective of this study is to evaluate the validity of infant industry argument under duopoly. Fourth, I examine the civil aircraft manufacturing industry which has a very close market structure discussed in this paper using two different approaches: a general descriptive case study of the industry and an empirical evaluation of its performance in the past twenty years.

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