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When the threat is stronger than the execution: trade and welfare under oligopoly

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  • Dermot Leahy
  • J. Peter Neary

Abstract

We compare the effects of changes in trade costs on trade volumes and on the gains from trade under Cournot and Bertrand competition. In both cases, the threshold trade costs below which the possibility of trade affects the domestic firm's behavior is the same; and welfare is U‐shaped under reasonable conditions. However, welfare is typically greater under Bertrand competition; for higher trade costs the volume of trade is greater under Cournot competition, implying a “van‐der‐Rohe Region”; and, for even higher trade costs, there exists a “Nimzowitsch Region”, where welfare is higher under Bertrand competition even though no trade takes place.

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  • Dermot Leahy & J. Peter Neary, 2021. "When the threat is stronger than the execution: trade and welfare under oligopoly," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 471-495, September.
    • Handle: RePEc:bla:randje:v:52:y:2021:i:3:p:471-495
    DOI: 10.1111/1756-2171.12380
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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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