Game theory - international trade

Economic integration is a trend in a globalized world
◦ Elimination of tariff and non-tariff barriers to the flow of goods, services, and factors-of-production between a group ofnations
◦ WTO rounds to organize free trade
◦ Regional integration is a sustainable trend in the world economy : E.U., ASEAN, NAFTA, …

Dealing with traditional tariff andnon-tariff barriers, multinational companies have to make choices : exports or FDI ?
The case we chose to present is a game theory application to world trade, in order to modelize thedifferent choices MNC face.

3 countries
◦ the home country (C1)
◦ the trade partner country (C2) which reached an agreement with C1
◦ A country (C3) which does not beneficiate fromany trade agreement (traditional trade bariers)

3 companies
◦ E1: National firm located in C1
◦ E2: MNC located in C2, which benefits from countries’ trade agreement
◦ E3: MNClocated in C3, suffering from C1’s trade barriers

E2 must decide whether to export its products to C1 or build a productive plant in C1 (Foreign Direct Investment). E3 must decidewhether to export its products to C1 or build a productive plant in C1(Foreign Direct Investment). E1 who is also about to decide to build a productive plant to satisfy the internaldemand of C1. If E1 decide not to build a plant its payoff will be zero.

The product is homogeneous The firm face similar production costs:
◦ Variable Costs: we assume a constantmarginal cost, and to simplify the analysis we set it to zero
◦ Fixed Costs: the fixed costs are split in 2 types:
The costs related to building a new plant (E1, E2, E3) The costsrelated to research & development of the product, if the firm is not already into the market (only E1)

◦ There are no costs related to transportation

More info in the file!!!!