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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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  1. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-48, March.
  2. Donsimoni, M.-P. & Gabszewicz, J.J., 1986. "Is international trade profitable to oligopolistic industries ?," CORE Discussion Papers 1986027, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. 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.
  4. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Tito Cordella, 1990. "Trade Liberalizaiton and Oligopolistic Industries: a Welfare Appraisal," Working Papers 100, Dipartimento Scienze Economiche, Universita' di Bologna.
  6. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
  7. M. Kandori & G. Mailath & R. Rob, 1999. "Learning, Mutation and Long Run Equilibria in Games," Levine's Working Paper Archive 500, David K. Levine.
  8. Motta, M., 1991. "Sunk costs and trade liberalisation," CORE Discussion Papers 1991027, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  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. 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.
  11. 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.
  12. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  13. 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.
  14. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
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Cited by:
  1. Cabrales, Antonio & Garcia-Fontes, Walter & Motta, Massimo, 2000. "Risk dominance selects the leader: An experimental analysis," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 137-162, January.
  2. Massimo Motta, 1996. "Advertising bans," Economics Working Papers 205, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1997.
  3. MONER COLONQUES , Rafael, 1995. "Cost Uncertainty and Trade Liberalization in International Oligopoly," CORE Discussion Papers 1995068, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. José J. Sempere Monerris & Rafael Moner Colonques & Amparo Urbano Salvador, 2010. "Trade liberalization in vertically related markets," Working Papers. Serie AD 2010-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Tharakan, Joe & Thisse, Jacques-François, 2001. "The Importance of Being Small. Or When Countries are Areas and not Points," CEPR Discussion Papers 2938, C.E.P.R. Discussion Papers.
  6. Tharakan, J., 2001. "Revisiting “On nations’ size and transportation costs”," CORE Discussion Papers 2001032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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