Cost Heterogeneity, Industry Concentration and Startegic Trade Policies

Abstract

This paper shows that if domestic firms do not have identical unit costs, then the interplay between the Herfindahl index of concentration and the elasticity of the slope of the demand curve is of major importance in the determination of optimal trade policies. When the demand curve is concave, an export tax will shift the domestic industry's concentration in favor of lower cost firms, resulting in an improvement in allocative production efficiency.

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