Group for Research in Decision Analysis

G-2016-82

Reciprocal dumping by locally regulated monopolists

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This paper develops an international-trade game with two locally regulated producers. They may freely export but have to sell in their local market at a price equal to their marginal cost. We consider a setting where local production is decided after exports. The rationale for this sequentiality in decision making is in the fact that exports are often set by contract long before expedition takes actually place. In the parlance of game theory, the game is played with a closed-loop information structure. We characterize sufficient conditions for existence and uniqueness of the subgame perfect Nash equilibrium in two scenarios, namely, without and with local regulation. In an asymmetric game with local regulation, we derive conditions under which dumping and cross-hauling take place. In the symmetric version of this game, we show that reciprocal dumping always occurs and that autarky Pareto-dominates this equilibrium. These elements are counter-telling the traditional viewpoint that price-making behavior is a necessary condition for dumping in a deterministic framework. Our model and results are of special interest in a context where locally regulated firms are playing a significant role in international trade.

, 20 pages