VERTICALLY INTEGRATED OLIGOPOLY AND INTERNATIONAL-TRADE POLICY

This paper examines the consequences of vertical integration with tran sfer pricing for the rivalry between duopoly firms in an international environment, using the (non-cooperative) Nash equilibrium to determin e the output equilibrium. Trade policy incentives resulting from verti cal integration in one country, focusing on export subsidy, profit tax rate, and attitudes towards transfer pricing in that country, are ana lysed. Without the transfer price penalty schema, a government can use either the subsidy or the tax rate to affect outcome of Cournot game. With the schema, introducing the interior solution to the transfer pr ice, the optimal policy involves the effective role of both instrument s.