Constantinos Syropoulos () (Department of Economics, Florida International University) Eric Bond (Department of Economics, Pennsylvania State University)
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In this paper, we explore the impact of reciprocal trade liberalization on collusive conduct between domestic and foreign firms interacting in multiple markets. In our benchmark model, which deals with a symmetric homogenous-goods oligopoly, we show that, in the absence of trade barriers, an efficient collusive agreement involves equal division of the market in each country. When trade costs are introduced, the most profitable cartel minimizes trade costs and requires domestic firms to divide each market between them. However, such cartel agreements are difficult to sustain because they entail high deviation incentives; therefore, trade costs create a tension between the profitability of collusive agreements and incentive constraints. Further, when the full monopoly outcome is unsustainable under free trade, the relationship between global constrained efficient profits and symmetric trade costs is not monotonic. As a consequence, reciprocal trade liberalization may be welfare-reducing. We also extend the analysis to consider the implications of product differentiation.
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Paper provided by Florida International University, Department of Economics in its series Working Papers with number
0310.
Find related papers by JEL classification: F1 - International Economics - - Trade
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