Strategic Interaction of International Markets: An Application to the Dairy Market

Abstract

This paper studies the relation between the government?s objectives
to sustain income in the dairy sector and the possibility to capture rent
in the world market. To do this, two different governmental policies
were considered: a direct export subsidy and a price discrimination
scheme. These policies were analyzed under strategic and non-strategic
scenarios. The results indicate that when there is non-strategic
interaction and there exists a low opportunity cost of public funds, the
two policies have the same effect on total welfare and lead to the
same wealth transfer to producers. When there is a strategic interaction
among producers, the price discrimination scheme leads to higher
consumer welfare but lower producer benefit, being the net result on
total welfare determined by the relative weights of the agents in the
welfare function. From the producers? point of view, the export subsidy
is preferred to the price discrimination scheme when there is
imperfect competition in the world market.