Optimal Export Policy Under Perfectly Complementary Intermediate Goods: Revisiting Brander– Spencer and Eaton–Grossman

Abstract

This study revisits the classical results of Brander and Spencer (1985, Export subsidies and international market share rivalry, Journal of International Economics, 18, 1–2, 83–100) and Eaton and Grossman (1986, Optimal trade and industrial policy under oligopoly, The Quarterly Journal of Economics, 101, 2, 383–406) by incorporating perfectly complementary intermediate goods into an export duopoly framework. We develop a three-country model that comprises two producers of intermediate goods in the upstream and two exporters of final goods in the downstream that compete in a third market. Unlike much of the existing literature, which treats intermediate inputs as substitutes, we explicitly model them as perfectly complementary system components. Using a three-stage game, we derive the optimal export policy under Cournot quantity competition, Bertrand price competition and consistent conjectural variations. Our findings indicate that, regardless of the mode of competition, an export subsidy on final goods remains the welfare-maximising policy of the exporting government. This conclusion is in contrast to Eaton and Grossman’s advocacy of export taxes under Bertrand competition and free trade under consistent conjectural variations. These results underscore the critical role of the production structure—particularly the configuration of complementary intermediate inputs—in shaping optimal trade policy. These analytical results offer clear, testable predictions for future empirical research on optimal export policies under alternative market structures and the strategic role of intermediate goods.

JEL Codes: F12, F13, F15, L13