In this paper loose competition policy towards strategic alliances is examined as an alternative to strategic trade policy. Alliances are assumed to design a strategic contract which changes incentives in the output market. permitting strategic alliances and using strategic trade policy yield exactly the same outcome if the good is not consumed domestically and all firms of a country form a single alliance. The performance of the policy options in a more general setting depends on a number of interacting factors including ((i)) the share of domestic consumption, (ii) the nature of product market competition, (iii) the initial number of firms in the industry, and (iv) the feasibility of international alliances. Irrespective of the nature of product market competition, the alliance solution performs particularly well for low to medium shares of domestic consumption and, if international alliances are feasible, in small number oligopolies. (C) 2000 Elsevier Science B.V. All rights reserved.
