#03-07:

In the strategic trade policy literature, the firms typically make positive profits at equilibrium policy levels. We show that this is not always true when firms from the developed (North) and developing (South) countries compete in the Northern market. In particular, the South firm may be pushed out of the Northern market. On the other hand, the Northern firm always maintains a market share in the South market in policy equilibrium. The critical assumption is that the Northern firms produce products of a superior quality than do their Southern counterparts.

Keywords: North-South trade, Vertically differentiated product, Strategic Trade Policy, Third market competion, Internal market competition.

JEL CLASSIFICATION: F 12, F 13.

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