INTERNATIONAL CAPACITY CHOICE AND NATIONAL MARKET GAMES

International trade is modelled as a two-stage game between firms in different countries. At the first stage firms choose their capacity and at the second stage play a separate price game in each national market, given their worldwide capacity. It is established that firms use capacity strategically in order to manipulate the distribution of rivals' output between markets. The volume of intra-industry trade is intermediate between the cases of integrated and segmented market Cournot equilibria. Countries gain from small import tariffs and export subsidies, but these gains are less than in the segmented market Cournot equilibrium case. © 1990.