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Country Asymmetries, Endogenous Product Choice and the Speed of Trade Liberalization

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  • Cabrales, Antonio
  • Motta, Massimo

Abstract

We analyse the effects of trade liberalization on firms' decisions and profits, and on consumers' welfare, in a product differentiation model with countries of different size. Firms decide product specifications at the beginning of the game, in which autarky is followed by trade liberalization (whose date is anticipated). Despite the heterogeneity, the highest level of welfare is attained for both countries when trade opens immediately. The impact on firms' profits can differ, however. Small country's firms benefit from larger market size but are disadvantaged when the scale of the home market affects the product choice decision. The opposite is true for the firm located in the large country.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1326.

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Date of creation: Feb 1996
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Handle: RePEc:cpr:ceprdp:1326

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Keywords: Country Size; International Trade; Product Differentiation; Trade Liberalization;

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References

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  1. Motta, Massimo, 1992. "Sunk Costs and Trade Liberalisation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(412), pages 578-87, May.
  2. John B Van Huyck & Raymond C Battalio & Richard O Beil, 1997. "Tacit coordination games, strategic uncertainty, and coordination failure," Levine's Working Paper Archive 1225, David K. Levine.
  3. Tito Cordella, 1990. "Trade Liberalizaiton and Oligopolistic Industries: a Welfare Appraisal," Working Papers 100, Dipartimento Scienze Economiche, Universita' di Bologna.
  4. Donsimoni, M.-P. & Gabszewicz, J.J., 1986. "Is international trade profitable to oligopolistic industries ?," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1986027, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Markusen, James R. & Venables, Anthony J., 1988. "Trade policy with increasing returns and imperfect competition : Contradictory results from competing assumptions," Journal of International Economics, Elsevier, vol. 24(3-4), pages 299-316, May.
  6. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, Econometric Society, vol. 61(1), pages 29-56, January.
  7. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, Econometric Society, vol. 61(5), pages 989-1018, September.
  8. Nguyen, Trien T. & Wigle, Randall M., 1992. "Trade liberalisation with imperfect competition : The large and the small of it," European Economic Review, Elsevier, vol. 36(1), pages 17-35, January.
  9. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, December.
  10. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  11. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  12. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  13. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  14. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, vol. 11(4), pages 531-551, November.
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Citations

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Cited by:
  1. Massimo Motta, 1996. "Advertising bans," Economics Working Papers 205, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1997.
  2. Tharakan, Joe & Thisse, Jacques-François, 2001. "The Importance of Being Small. Or When Countries are Areas and not Points," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2938, C.E.P.R. Discussion Papers.
  3. Tharakan, J., 2001. "Revisiting “On nations’ size and transportation costs”," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2001032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. MONER COLONQUES , Rafael, 1995. "Cost Uncertainty and Trade Liberalization in International Oligopoly," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1995068, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. José J. Sempere Monerris & Rafael Moner Colonques & Amparo Urbano Salvador, 2010. "Trade liberalization in vertically related markets," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2010-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. Cabrales, Antonio & Garcia-Fontes, Walter & Motta, Massimo, 2000. "Risk dominance selects the leader: An experimental analysis," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 18(1), pages 137-162, January.

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