Working Paper: NBER ID: w21008
Authors: James A. Brander; Barbara J. Spencer
Abstract: This paper investigates the effect of endogenous horizontal product differentiation on trade patterns and the gains from trade under Bertrand and Cournot oligopoly. Firms differentiate their products to mitigate competition, but only if the investment required is not too high. Investment in product differentiation takes place in a much wider range of cases and results in a greater difference between products under Bertrand than Cournot competition. In our model, trade in homogeneous products never takes place under Bertrand competition: Bertrand firms export only if they differentiate their products. Cournot firms may trade in either homogeneous or differentiated products. If there is trade, consumers tend to be better off with Bertrand than Cournot competition due to greater product differentiation and more aggressive pricing, but higher levels of investment can raise Bertrand profit above Cournot profit and also above the monopoly profit at autarky when investment costs are sufficiently low.
Keywords: No keywords provided
JEL Codes: F12; L1; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decision to differentiate products (L15) | ability to engage in trade (F10) |
| type of oligopoly (Bertrand vs. Cournot) (L13) | consumer welfare outcomes (D69) |
| higher levels of investment (E22) | varying profit outcomes (L21) |
| effectiveness of differentiation expenditures (L15) | likelihood of trade occurring (F19) |