with p3 (z, βH,s) > 0 and p13 (z, βH,s) < 0. Hence, Π1H3 = p3 +zp13 is positive only
if the export promoting policy does not make demand too rigid: in such a case, when
entry is free, by Prop. 3, overinvestment in export promotion is optimal and makes the
domestic firm more aggressive abroad. Notice that overinvestment could emerge even
when the number of firms is exogenous, but only under strategic substitutability, by
Prop.1 (and not in presence of too many domestic firms). Things are however different
under price competition. In this case, we have:
ΠH (z, βH,s)=
(1 - c)D(1 ∙βH ∙s)
=(pH - c) D(pH∙βH∙s)
with D3 (pH∙βH∙s) > 0 and D13 (pH∙βH∙s) > 0.SinceΠ1H3 = -p2H [D3 +(pH - c)D13] <
0, according to Prop. 3, we always have a tendency toward underinvestment in export
promoting policies, which again induces an aggressive behaviour of the domestic firm
abroad. Notice that the opposite result would emerge with barriers to entry according
to Prop. 1. Summarizing:
Proposition A1. When export promotion increases demand for domestic goods
without making it too rigid: under quantity competition, overinvestment in export
promotion is optimal a) only under strategic substitutability when the number of
firms is exogenous, b) always under free entry; under price competition, a) overinvest-
ment in export promotion is optimal when the number of firms is exogenous, and b)
underinvestment is optimal under free entry.
In a trade context, transport costs are crucial since the marginal cost of exports
depends on them. The government can implement policies to reduce transport costs
for all exporting firms. A main example is given by investments in infrastructures
for international communication networks, but more indirect examples include the
establishment of easier business connections with other countries, reduction of bu-
reaucracy for export duties and even the development of trade and currency unions to
reduce import tariffs and uncertainty costs related with the exchange rate. The follow-
ing analysis can be applied to policies to promote cost reducing investment (process
R&D).
Consider a policy which can reduce the marginal costs of the domestic firm through
a reduction in transport costs. Assume that marginal costs are constant for the domes-
tic firm and equal to c(s) with c(0) = c, which is the same level faced by international
firms, and c0 (s) < 0: the higher is the investment the smaller is the marginal cost.
Under quantity competition we have the profit of the domestic firm:
ΠH (z∙βH∙s)=z [p(z∙βH) - c(s)]
which implies Π1H3 = -c0 (s) > 0. Under price competition we have:
∏H (z,βH,s) = ɑ
- c(s)} Dθ ,β√)
=(pH - c) D (pH∙βH)
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