Inferring conduct to guide strategic trade policy

Abstract In oligopoly market structures, optimal trade policies depend on the conduct of competing firms. Whether firms compete with prices or quantities as the strategic variables has a major quantitative and, sometimes, qualitative impact on the design of optimal trade policies. Conduct is not directly observable, but we develop an econometric method to infer it from data on prices, quantities, and a cost shifter such as tariffs. We apply the method to the widely used case of a constant elasticity of substitution demand and ad valorem tariffs. Using simulations, we show how policy makers could infer conduct from estimation and thereby generate domestic welfare gains from strategic trade policy when conduct is ex ante unknown. Several caveats from the literature remain important, but our method mitigates concerns over imperfect information on conduct.