ABSTRACT This paper studies how trade policy can affect not only the level of markups but also the mode and intensity of competition in general equilibrium. We embed a tractable form of supply‐function competition—where firms commit ex ante to upward‐sloping supply schedules—into Neary's general oligopolistic equilibrium (GOLE) framework. Firms endogenously choose the slope of their supply schedules at a convex real‐resource cost, which we interpret as a flexibility investment. In a symmetric two‐country benchmark with per‐unit tariffs, equilibrium reduces to a single scalar condition in aggregate supply responsiveness; when multiple roots arise, a local stability criterion selects the relevant branch. Comparative statics show that, on the stable interior equilibrium, higher tariffs raise equilibrium supply responsiveness and thereby change competitive conduct, with general‐equilibrium implications for wages and welfare. Welfare falls because higher responsiveness crowds labor into flexibility investment and away from production.
Keita Kamei (Thu,) studied this question.