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Title: |
Infant Industry Protection Revisited: Entry
Deterrence and Entry Promotion When a Foreign Monopolist Has Unknown
Costs |
| Author: |
Bhattacharjea,
Aditya |
| Author
Affiliation: |
U Delhi |
| Source: |
International Economic Journal, Autumn 2002, v. 16, no. 3, pp. 115-133 |
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Publication Date: |
Autumn 2002 |
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Abstract: |
In 1791,
Alexander Hamilton suggested that assuring protection to domestic
entrants could pre-empt entry-deterrence by foreign firms. This paper
reformulates his argument in game-theoretic terms with asymmetric cost
information, imposing the requirement that both the foreign firm's
threat and the home government's promise of protection should be
credible. It derives a simple optimal tariff formula that depends only
on the expectation of foreign costs. It then shows that this tariff can
lead to welfare-decreasing entry, but only if the foreign firm is
relatively inefficient. However, if the formula is applied with dynamic
consistency, and is rationally anticipated by both foreign and domestic
firms, it prevents foreign entry-deterrence and improves domestic
welfare. |
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