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Free Trade Agreement with Endogenous Market Structure

Author

Listed:
  • Lijun Pan
  • Takatoshi Tabuchi

Abstract

We examine the incentives of free trade agreement (FTA) formation between two countries under endogenous market structure with leaders and followers. We demonstrate that establishing a FTA is neither an equilibrium outcome nor socially optimal when consumer demand and fixed cost are intermediate, products are close substitutes and countries are asymmetrical. This is because the FTA induces exit of followers, which makes the market less competitive and shrinks the leader’s production both in the domestic and foreign markets. We also show that large developing countries are less likely to establish a FTA than small developed countries.

Suggested Citation

  • Lijun Pan & Takatoshi Tabuchi, 2019. "Free Trade Agreement with Endogenous Market Structure," The Japanese Economic Review, Japanese Economic Association, vol. 70(4), pages 426-445, December.
    • Handle: RePEc:bla:jecrev:v:70:y:2019:i:4:p:426-445
    DOI: 10.1111/jere.12214
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    Cited by:

    1. Lijun Pan & Yongjin Wang, 2020. "Competition among Large and Heterogeneous Small Firms," Papers 2005.14442, arXiv.org.
    2. Pan, Lijun & Wang, Yongjin, 2020. "Competition among large and heterogeneous small firms," Economics Letters, Elsevier, vol. 196(C).

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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