136-137). Assuming that Boeing has a headstart, the likely outcome is that of Airbus deciding not to produce the aircraft, in favor of 0 loss, rather than to enter the market against Boeing, in which both firms would each incur losses amounting to -5. However, once Europe decides to subsidize Airbus, the outcome of the game shifts in favor of Airbus, and it can decide to go head-on with Boeing in the market, earning profits while Boeing incurs losses. Moreover, should Boeing decide to not produce as it would be incurring 0 loss in this, Airbus by producing the aircraft would allow it to raise its profits from 0 loss in the previous scenario with no subsidy to 110 profits post-subsidy by Europe. Krugman further notes that out of this, 100 represents a gain of national income for Europe, and conversely, a loss of the same amount for America. This shows that under some circumstances, a country can lift its welfare by supporting its own firms against foreign competitors. At the same time, a domestic firm can lower the profits of other firms which wish to enter the domestic market.
Another reason for strategic trade policy as the case above is when viewed from the possibility of existence of external economies - o ...Show more