Working Paper: NBER ID: w1194
Authors: James A. Brander; Paul Krugman
Abstract: This paper develops a model in which the rivalry of oligopolistic firms serves as an independent cause of international trade. The model shows how such rivalry naturally gives rise to "dumping" of output in foreign markets, and shows that such dumping can be "reciprocal" -- that is, there may be two-way trade in the same product. Reciprocal dumpingis shown to be possible for fairly general specification of firm behaviour.The welfare effects of this seemingly pointless trade are ambiguous. On one hand, resources are wasted in the cross-handling of goods; on the other hand, increased competition reduces monopoly distortions. Surprisingly,in the case of free entry and Cournot behaviour reciprocal dumping is unanibiuously beneficial.
Keywords: reciprocal dumping; international trade; oligopolistic competition
JEL Codes: F12; F13; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Oligopolistic rivalry among firms (D43) | Reciprocal dumping (F18) |
| Firms' understanding of market segmentation (L10) | Quantity decisions (C69) |
| Reciprocal dumping (F18) | Two-way trade in identical products (F10) |
| Free entry (Z38) | Welfare effects of reciprocal dumping (F18) |
| Transport costs + Competition dynamics (L11) | Ambiguous welfare effects (D69) |
| Reciprocal dumping + Free entry + Cournot behavior (D43) | Beneficial welfare effects (D69) |
| Negligible transport costs (L91) | Welfare-improving trade (D69) |
| Prohibitive transport costs (L91) | Reduced welfare from trade (F10) |