This paper by Jonathan Eaton and Gene M. Grossman, published in the NBER Working Paper Series, provides an integrative treatment of the welfare effects of trade and industrial policy under oligopoly. The authors characterize the form that optimal intervention takes under various assumptions about the number of firms, their conjectural variations, the substitutability of their products, and the markets in which they are sold. Key findings include: 1. **Optimal Trade Policy in Duopoly**: In a duopoly with no domestic consumption, optimal policy depends on the difference between firms' actual responses to their rivals and their conjectured responses. If conjectures are consistent, free trade is optimal. A tax or subsidy is indicated depending on the sign of this difference. 2. **Multi-Firm Oligopoly and Consistent Conjectures**: With more than one domestic firm but no domestic consumption, an export tax is indicated if conjectures are consistent. Production subsidies and export tax-cum-subsidies can raise national welfare in the presence of domestic consumption, as they mitigate the consumption distortion caused by the deviation of price from marginal cost. 3. **Domestic Consumption**: When there is domestic consumption, production taxes or subsidies and export taxes or subsidies have different effects. A production subsidy can raise national welfare by reducing the price faced by domestic consumers, while an export tax or subsidy may be indicated depending on whether the country is a net exporter or importer. The paper also discusses the role of consistent conjectures in eliminating the profit-shifting motive for trade policy intervention and the importance of considering both terms-of-trade effects and consumption distortion effects when formulating optimal trade or industrial policy.This paper by Jonathan Eaton and Gene M. Grossman, published in the NBER Working Paper Series, provides an integrative treatment of the welfare effects of trade and industrial policy under oligopoly. The authors characterize the form that optimal intervention takes under various assumptions about the number of firms, their conjectural variations, the substitutability of their products, and the markets in which they are sold. Key findings include: 1. **Optimal Trade Policy in Duopoly**: In a duopoly with no domestic consumption, optimal policy depends on the difference between firms' actual responses to their rivals and their conjectured responses. If conjectures are consistent, free trade is optimal. A tax or subsidy is indicated depending on the sign of this difference. 2. **Multi-Firm Oligopoly and Consistent Conjectures**: With more than one domestic firm but no domestic consumption, an export tax is indicated if conjectures are consistent. Production subsidies and export tax-cum-subsidies can raise national welfare in the presence of domestic consumption, as they mitigate the consumption distortion caused by the deviation of price from marginal cost. 3. **Domestic Consumption**: When there is domestic consumption, production taxes or subsidies and export taxes or subsidies have different effects. A production subsidy can raise national welfare by reducing the price faced by domestic consumers, while an export tax or subsidy may be indicated depending on whether the country is a net exporter or importer. The paper also discusses the role of consistent conjectures in eliminating the profit-shifting motive for trade policy intervention and the importance of considering both terms-of-trade effects and consumption distortion effects when formulating optimal trade or industrial policy.