Working Paper: CEPR ID: DP5023
Authors: Richard Friberg; Mattias Ganslandt
Abstract: This paper examines if international trade can reduce total welfare in an international oligopoly with differentiated goods. We show that welfare is a U-shaped function in the transport cost as long as trade occurs in equilibrium. With a Cournot duopoly trade can reduce welfare compared to autarky for any degree of product differentiation. Under Bertrand competition we show that trade may reduce welfare compared to autarky, if firms produce sufficiently close substitutes and the autarky equilibrium is sufficiently competitive. Otherwise it cannot.
Keywords: Intraindustry trade; Oligopoly; Product differentiation; Reciprocal dumping; Transport costs
JEL Codes: F12; F15; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade under Bertrand competition (D43) | Welfare (I38) |
| Close substitutes and competitive autarky equilibrium (D41) | Trade under Bertrand competition may reduce Welfare (D43) |
| Transport costs decrease (R41) | Welfare initially increases (I38) |
| Welfare initially increases (I38) | Welfare can decrease again (I38) |
| Trade under Cournot competition (D43) | Welfare (I38) |
| Degree of product differentiation (L15) | Trade under Cournot competition reduces Welfare (D43) |
| Aggressive price competition in Bertrand model (D43) | Close substitutes do not enhance consumer value (L15) |