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Preferential Trade Liberalization with Endogenous Cartel Discipline: Implications for Welfare and Optimal Trade Policies

Author

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  • Delina Agnosteva
  • Constantinos Syropoulos
  • Yoto V. Yotov

Abstract

We consider an international cartel whose members interact repeatedly in their own as well as in third-country segmented markets. Cartel discipline-an inverse measure of the degree of competition between firms-is endogenously determined by the cartel’s incentive compatibility constraint (ICC), which links strategically markets that are seemingly unrelated. Owing to this linkage, trade cost reductions induce cartel members to adjust their sales, not only due to direct effects, but also due to spillover effects related to cartel discipline. We apply these ideas to preferential trade agreements (PTAs) and show that the indirect effects can give rise to trade diversion. We also characterize the welfare effects of preferential tariff cuts for all countries under various circumstances regarding the determination of external PTA trade policy. A persistent finding is that, in the absence of appropriate regulation, preferential trade liberalization can be welfare-reducing even when external policy is jointly optimal.

Suggested Citation

  • Delina Agnosteva & Constantinos Syropoulos & Yoto V. Yotov, 2020. "Preferential Trade Liberalization with Endogenous Cartel Discipline: Implications for Welfare and Optimal Trade Policies," CESifo Working Paper Series 8554, CESifo.
    • Handle: RePEc:ces:ceswps:_8554
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    1. Arevik Gnutzmann-Mkrtchyan & Hoffstadt, 2020. "Use and Abuse of Antidumping by Global Cartels," CESifo Working Paper Series 8729, CESifo.

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    More about this item

    Keywords

    multimarket contact; repeated interactions; constrained collusion; intra-industry trade; welfare; optimal trade policies;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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