DP218 | Optimum Trade Policy Towards Imperfectly Competitive Industries: Two Norwegian Examples

Publication Date

01/12/1987

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Abstract

The paper studies the effects of trade and industrial policy towards two imperfectly competitive Norwegian industries - ski production and Caribbean cruise shipping. The former is an import-competing industry in which consumer prices and product selection are the key issues; the latter is a pure export industry in which the maximization of Norwegian profits is the relevant objective. The paper sets up numerical models of the two industries and uses these to simulate the effects of policy intervention. In the ski market, it is shown that production subsidies to domestic firms will give a welfare gain, but the optimum subsidy is highly sensitive to cost and entry conditions; asymmetric information may produce perverse cost incentives. In the cruise industry, the policy question is whether or not to permit Norwegian ships to use less expensive foreign crews. It is shown that the answer depends critically on the nature of foreign competition.