Mixed Strategy Trade Equilibria
Two major paradigms prevail in trade theory: perfect competition and monopolistic competition. In the former case, only prices are important whereas product characteristics are important in the latter case. In both instances, pure-strategy equilibria exist. This paper considers the hybrid situation where some customers care only about the price while others have a brand preference or care about product characteristics. It is shown that an equilibrium in pure strategies does not exist but that a mixed-strategy equilibrium does exist. This in turn implies endogenous uncertainty in the pattern, terms, and the gains from trade.
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Volume (Year): 25 (1992)
Issue (Month): 2 (May)
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