Kathleen Hogan on Dixit, Avinash - Dictionary of Arguments

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Avinash Dixit: Avinash Dixit is an influential Indian-American economist known for his work in game theory, international trade, and public policy. He co-developed models of monopolistic competition and strategic behavior in trade, contributing significantly to the New Trade Theory. His work blends rigorous theory with practical insights into economic policy and institutions. _____________ Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments.

> Hogan, Kathleen	> Dixit, Avinash	Kathleen Hogan on Dixit, Avinash - Dictionary of Arguments Krugman III 12 Avinash Dixit/trade policies/international trade/Kala Krishna/Kathleen Hogan/Phillip Swagel: Since Dixit’s model (1988)⁽¹⁾ is probably the most influential of [calibration] models to date, we examine how an alternative specification of this model alters the policy recommendations and welfare results of the calibration exercise. As does Dixit, we apply the model to US.-Japan competition in the automobile industry, expanding the years examined to the full range from 1979 to 1985. VsDixit: The specification we employ is richer than Dixit’s in that we allow product differentiation not only between U.S. and Japanese goods, but also between goods made within each of the countries.* >International trade, >Trade policies, >Models, >Economic models, >Calibration, >New trade theory. The advantages of doing so are twofold. First, the richer specification allows us to get estimates for the extent of product differentiation, as well as timevarying behavioral parameters for firms and consumers. Second, it allows us to ask which results from Dixit’s simpler model are robust and which are artifacts of the model specification. Optimal trade policy: The effect of the richer specification is to completely reverse the sign of the resulting optimal trade policy: we find the optimal policy to be a subsidy to rather than a tax on imports. VsDixit: In fact, following the policies recommended by Dixit’s model can result in a welfare loss if the “true” model is as we specify. The more detailed specification also greatly affects the implicit estimates of collusion/competition between firms. >Competition, >Mergers. Competition: Our results suggest that auto industry firms behave more competitively than Bertrand oligopolists, as opposed to Dixit’s finding of competition somewhere between that of Bertrand and Cournot oligopolists. Dixit’s result is in part a byproduct of his assumption that firms within a nation produce a homogeneous good. Price/marginal cost: With this assumption, the existence of any markup of price above marginal cost implies that behavior is more collusive than Bertrand. On the other hand, some results are robust. For example, the effects on firms’ behavior of trade policies, particularly the voluntary export restraints (VERs) imposed at the end of 1981, correspond to the effects noted by Dixit. Our implicit estimates of demand cross-elasticities are also consistent with other sources. >Cournot Competition, >Bertrand Competition. Krugman III 13 In addition, the targeting of instruments to distortions evident in Dixit’s results seems to carry through. Finally, as is common with most calibrated trade models, the extent of welfare gains from optimal policies, particularly optimal trade policies alone, remains quite limited. As in Dixit (1988)⁽¹⁾, we estimate optimal polices both with and without monopoly (union) labor rents. We then compare our results to Dixit’s. Dixit: Dixit finds that the optimal policy consists of a tariff on imports and a subsidy to domestic production. VsDixit: In contrast, our model indicates a subsidy to both imports and domestic production to be optimal. We suspect that this is related to our demand specification, which increases the importance of consumer surplus in welfare, thereby increasing the attractiveness of import subsidies which raise consumption. In addition, competition in our model appears to be quite vigorous.* This tends to limit the gains from using the optimal production subsidy, as these gains are largest in the face of less competitive behavior. As does Dixit, we find that the existence of labor rents raises the optimal subsidy to production and reduces, and in some cases reverses, the optimal import subsidy. Cf. >Optimal tariffs. * Dixit (1988)⁽¹⁾, in contrast, assumes that goods produced within a country are perfect substitutes for one another-that a Chevrolet is the same as a Lincoln or a Pontiac. Although our specification allows for imperfect substitution between all products, the separability we impose groups together all U.S. cars and all Japanese cars. That is, our model puts a Chevy in the same group as a Cadillac, and a Civic in the same group as an Acura. ((s) In the economics of oligopoly, the Cournot and Bertrand models explore different ways firms can compete. Cournot models focus on quantity competition, where firms choose output levels, while Bertrand models focus on price competition, where firms set prices. In Bertrand competition, firms making identical products often reach an equilibrium where prices are equal to marginal costs, leading to zero economic profits. In contrast, Cournot competition typically leads to higher prices and positive profits for firms, as they limit their output to maximize profits.) * The direction of optimal trade policy is known to he related to the extent of competition, as parametrized by the choice of the strategic variable and thus in our model by the CVs. For example, in Eaton and Grossman’s (1986)⁽²⁾ simple model of duopolistic competition in third party markets, a tax on exports turns out to be optimal with price competition, while a subsidy is optimal with quantity competition. 1. Dixit, A. K. 1988. Optimal trade and industrial policies for the US automobile industry. In: Empirical methods for international trade, ed. R. Feenstra. Cambridge: MIT Press. 2. Eaton, J., and G. Grossman. 1986. Optimal trade and industrial policy under oligopoly. Quarterly Journal of Economics 100:383-406. Kala Krishna, Kathleen Hogan, and Phillip Swagel. „The Nonoptimality of Optimal Trade Policies: The U.S. Automobile Industry Revisited, 1979-1985.“ In: Paul Krugman and Alasdair Smith (Eds.) 1994. Empirical Studies of Strategic Trade Policy. Chicago: The University of Chicago Press. _____________ Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.	Hogan, Kathleen EconKrug I Paul Krugman Volkswirtschaftslehre Stuttgart 2017 EconKrug II Paul Krugman Robin Wells Microeconomics New York 2014 Krugman III Paul Krugman Alasdair Smith Empirical Studies of Strategic Trade Policy Chicago: The University of Chicago Press 1994

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