Final answer:
Strategic trade policy in the Brander-Spencer example of Airbus and Boeing relies on product differentiation, economies of scale, government support, and imperfect competition.
Step-by-step explanation:
In the Brander-Spencer example of Airbus and Boeing, strategic trade policy can work effectively due to certain key assumptions. These assumptions include:
Product Differentiation: Airbus and Boeing produce differentiated products with distinct features and qualities, which allows them to compete based on product characteristics rather than solely on price.
Economies of Scale: Both companies benefit from economies of scale, which means that as they produce more units, their average production costs decrease. This enables them to achieve cost advantages and increase their competitiveness.
Government Support: Strategic trade policy assumes that governments are willing to support their domestic industries through various measures such as subsidies or trade barriers. This support can help a company like Airbus gain a competitive advantage over Boeing.
Imperfect Competition: The Brander-Spencer model assumes that the market for Airbus and Boeing is characterized by imperfect competition, meaning that there are few competitors in the market, allowing the companies to have some degree of pricing power.