Working Paper: CEPR ID: DP15112
Authors: Dermot Leahy; Peter Neary
Abstract: We compare trade liberalization under Cournot and Bertrand competition in reciprocal markets. In both cases, the critical level of trade costs below which the possibility of trade affects the domestic firm's behavior is the same; trade liberalization increases trade volume monotonically; and welfare is U-shaped under reasonable conditions. However, welfare is typically greater under Bertrand competition; for higher trade costs the volume of trade is greater under Cournot competition, implying a "van-der-Rohe Region" in parameter space;and, for even higher trade costs, there exists a "Nimzowitsch Region", where welfare is higher under Bertrand competition even though no trade takes place.
Keywords: Cournot and Bertrand competition; Cross-hauling; Nimzowitsch region; Oligopoly and trade; Trade liberalization
JEL Codes: L13; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | trade volume (F10) |
| trade liberalization (F13) | welfare (I38) |
| trade costs (below critical threshold) (F19) | welfare (Cournot vs Bertrand) (D69) |
| trade costs (high) (F14) | welfare (Nimzowitsch region) (D69) |
| trade volume (Cournot) (F14) | welfare (Bertrand) (D69) |