Nontariff Trade Controls and Leader-Follower Relations in International Competition.

A simple duopoly model is constructed in which leader-follower relations arise as part of a subgame-perfect equilibrium in a game of endogenous timing. The author shows that, in the absence of policy intervention, cost asymmetries between firms can help sustain collusive hierarchical organization of markets. On the basis of this model, he then analyzes the effects of voluntary export restraints and import quotas in the presence of foreign and international duopolies. The author's analysis reveals that, in contrast to the existing literature, these nontariff trade controls can break the stability of leader-follower relations and thereby raise an importing country's welfare. Copyright 1996 by The London School of Economics and Political Science.