Richard E' Baldwin

1

• Richard E. Baldwin
• Read only up to (not including) globalisation
  low-wage labour

2
Strategy in a Duopoly Model

• Two firms, one industry, new aircraft decision.
• Produce or Not Produce.
• Payoff Table at right.
• Payoffs to each given strategy choice of other.
• Assume particular structure.

• Features
• If both firms choose to produce new aircraft,
  both suffer losses.
• If either firm is sole producer, then they make
  substantial profits.
• Equilibrium
• No unique equilibrium.
• Firm could guarantee market if had credible entry
  commitment.

3
Effects of a Subsidy to Airbus

• Targeted Govt subsidy can provide a credible
  entry commitment.
• Assume EU guarantees Airbus a 25 mill. Subsidy
  to produce new aircraft.
• New Payoff Table at right.
• Payoffs to Airbus change.

• Features
• Profitable for Airbus to enter regardless of
  Boeing strategy.
• entry is a dominant strategy for Airbus
• Boeing knows Airbus will enter, so Boeing will
  not enter to avoid loss.
• Equilibrium with Subsidy
• Subsidy ensures Airbus produces new aircraft
  Boeing does not enter.
• EU Subsidy acts as deterrent to U.S. firm, allows
  EU industry to capture industry.

4
Duopoly Model Revisited

• Two firms, one industry with new good.
• Produce or Not Produce.
• New Payoff Table at right.
• Assume Boeing has cost advantage in prodn over
  Airbus of 25 million.

• Features
• Boeing will produce regardless of decision by
  Airbus due to advantage.
• Airbus loses with certainty, so will not enter
  industry.
• Equilibrium
• Boeing is the single low-cost producer that
  captures entire market.
• No need for first-mover advantage, no uncertainty
  about market structure.

5
Effects of a Subsidy Revisited

• Effects of same targeted Govt subsidy as before.
• EU guarantees Airbus a 25 million Subsidy to
  produce new aircraft.
• New Payoff Table
• Payoffs to Airbus change.

• Features
• Each firm would be better off if the other chose
  not to produce.
• Both firms will choose to produce the aircraft as
  their best strategy.
• Another Example of Prisoners Dilemma.
• Both firms will produce the aircraft, both firms
  get low payoff.
• EU subsidy is worst possible policy here as both
  firms lose.

6
Concord vs SST Winning means losing

• Change the outcomes to an activity that
  shouldnt be done by anyone.

7
Japans Semiconductor Success

• Learning curve in D-RAMs.
• Unusual manufacturing process.

8
Japans Semiconductor Success

• Learning curve in D-RAMs
• US vs Jpn position in 1980s

L-cur (Jpn)
L-cur (US)
Cum.Prodn
9
Japans Semiconductor Success

• Japans industry policy Mkt Access Restriction
• Japanese firms sell more than they would
  otherwise US firms sell less than they would
  otherwise.
• Impact on MCs and thus market shares.

L-cur (Jpn)
L-cur (US)
Cum.Prodn
US free mkt
With M.A.R.
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Japans Semiconductor Success

• Outcome
• Japan produced commodity chips, but not
  high-value micro processors.
• Won market shares but not extraordinary profits.
• Failed to generate c.a. in profitable chips.
• Korea et al now dominate D-RAMs.
• Lessons
• Mkt share doesnt equal success.
• Picking winners especially hard in new areas.
• Dynamic c.a. stories easy to tell, but dont
  always work.

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• END