Price competition, technology licensing and strategic trade policy

We consider strategic trade policy when two firms from two different countries that start out with different production costs compete in prices in a third country, and technology transfer between the two firms is possible through technology licensing. We find that optimal policy when technology licensing is possible can be very different from optimal policy in the standard strategic trade policy set-up where the possibility of technology licensing is ignored. For example, we find that in a differentiated duopoly with price competition, optimal policy can be an export subsidy and not an export tax. Also, unlike results regarding strategic trade policy with asymmetric costs, optimal policy for a government when technology licensing is possible is neither necessarily (a) higher in absolute value, the more cost-competitive its domestic firm, nor (b) monotonically related to the extent of cost-competitiveness of its domestic firm. Furthermore, we find cases in which welfare is lower when technology licensing is possible than in circumstances where technology licensing is not allowed.