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Export Subsidies and Oligopoly with Switching Costs

I examine export policy using a two-period model of oligopolistic competition with switching costs. A switching costs model captures the idea that market share in one period affects profits and welfare in future periods. If consumers are impatient, firms and governments are patient and switching costs are significant then governments subsidize first period exports and tax second period exports, otherwise governments tax exports in both periods. Although governments may subsidize first period exports, each country is made worse off when both countries subsidize. In addition, firms 'dump' (price less than marginal cost) under conditions similar to those required for export subsidies.

Keywords: switching costs, oligopoly theory, export subsidies, international trade

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