The Brander–Spencer model
is an economic model in international trade
originally developed by James Brander and Barbara Spencer in the early 1980s. The model illustrates a situation where, under certain assumptions, a government can subsidize
domestic firms to help them in their competition against foreign producers and in doing so enhances national welfare. This conclusion stands in contrast to results from most international trade models, in which government non-interference is socially optimal.
The basic model is a variation
on the Stackelberg–Cournot "leader and follower" duopoly game. Alternatively, the model can be portrayed in game theoretic terms as initially a game with multiple Nash equilibria, with government having the capability of affecting the payoffs to switch to a game with just one equilibrium
. Although it is possible for the national government
to increase a country's welfare in the model through export
subsidies, the policy is of beggar thy neighbor type. This also means that if all governments simultaneously attempt to follow the policy prescription
of the model, all countries would wind up worse off.
The model was part of the "New Trade Theory
" that was developed in the late 1970s and early 1980s, which incorporated then recent developments from literature on industrial organization into theories of international trade. In particular, like in many other New Trade Theory models, economies of scale (in this case, in the form of fixed entry costs) play an important role in the Brander–Spencer model.