STRATEGIC TRADE POLICY AND PRISONER`S DILEMMA
STRATEGIC TRADE POLICY AND PRISONER`S DILEMMA

Summary/Abstract: The prisoner's dilemma has been a rich source of research material since the 1950's. Economists extend the prisoner's dilemma by offering more choices, other than simply “cooperate" or “defect," and by providing indirect interactions. Strategic trade policy refers to trade policy that affects the outcome of strategic interactions between firms in an actual or potential international oligopoly. A main idea is that trade policies can raise domestic welfare by shifting profits from foreign to domestic firms. A well-known application is the strategic use of export subsidies, but import tariffs as well as subsidies to R&D or investment for firms facing global competition can also have strategic effects. Since intervention by more than one government can lead to a Prisoner’s Dilemma, the theory emphasizes the importance of trade agreements that restrict such interventions.

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