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Perfect Competition and Intra-Industry Trade

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Author Info

  • Ernest Aksen
  • Jacek Cukrowski

Abstract

The paper presents a formal study of how risk aversion can be applied to analysis of international trade. It seeks to illustrate, amongst other things, that risk-averse firms operating in perfectly competitive markets with uncertainty of demand tend to diversify markets and that this provides the basis for international trade in identical commodities between identical countries. The paper argues that such trade may be welfare-improving, despite efficiency losses due to cross-hauling and transportation costs. Moreover, the analysis shows that reduction of tariff per unit of imported goods (e.g., due to the organization of custom unions) increases trade flows but does not necessarily improve total welfare. Therefore, in some particular cases, the use of sophisticated government intervention can lead to better outcomes than can free trade. 5

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File URL: http://www.case-research.eu/upload/publikacja_plik/ceu40.pdf
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Bibliographic Info

Paper provided by CASE-Center for Social and Economic Research in its series CASE-CEU Working Papers with number 0040.

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Length: 24 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:sec:ceuwps:0040

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Related research

Keywords: reasons for trade; intra-industry trade; demand uncertainty; risk aversion; market diversification;

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References

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  1. James Brander, 1980. "Intra-Industry Trade in Identical Commodities," Working Papers 380, Queen's University, Department of Economics.
  2. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
  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. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
  5. Appelbaum, Elie & Katz, Eliakim, 1986. "Measures of Risk Aversion and Comparative Statics of Industry Equilibrium," American Economic Review, American Economic Association, vol. 76(3), pages 524-29, June.
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Cited by:
  1. Christian Gormsen, 2012. "Intransparent Markets and Intra-Industry Trade," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00678264, HAL.
  2. repec:hal:journl:halshs-00678264 is not listed on IDEAS

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