Working Paper: CEPR ID: DP277
Authors: Anthony J. Venables
Abstract: A series of models are developed in which international trade is modelled as a two-stage game between firms in two countries. At the first stage firms choose their productive capacity. At the second stage different types of market game are played. The most interesting case is that in which firms play a separate price game in each national market, given their worldwide capacity levels. It is established that (i) firms use capacity strategically, in order to manipulate the distribution of rivals' output between markets; (ii) the volume of intra-industry trade is intermediate between the two cases most extensively studied in the trade literature (integrated- and segmented-market Cournot equilibria); and (iii) countries gain from small import tariffs and export subsidies, but these gains are less than in the case of segmented markets and a Cournot equilibrium.
Keywords: capacity choice; oligopoly; market segmentation; integration; intraindustry trade
JEL Codes: 410; 422; 611
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strategic capacity choices (D25) | intraindustry trade (F12) |
| capacity choices (D24) | market outputs (P42) |
| trade policy (F13) | welfare outcomes (I38) |