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Gains from Variety? Product Differentiation and the Possibility of Losses from Trade under Cournot Oligopoly with Free Entry

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In a free-entry Cournot oligopoly model with a quadratic utility function that yields differentiated products, it is shown that there are losses from trade when the trade cost is close to the prohibitive level. Although the total number of varieties increases, there is a reduction in consumer surplus. This occurs because trade leads to an increase in imported varieties where consumer surplus is low due to the high trade cost and a decrease in domestically-produced varieties where consumer surplus is high. This result is in contrast with results from the free-entry Cournot oligopoly models with homogeneous products of Brander and Krugman (1983) and Venables (1985); the monopolistic competition models such as Krugman (1980) and Venables (1987), and heterogeneous firm models such as Melitz (2003) and Melitz and Ottaviano (2008).

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2016/3.

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Length: 14 pages
Date of creation: Apr 2016
Handle: RePEc:cdf:wpaper:2016/3
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  1. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
  2. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 541-585.
  3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  4. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 985-985.
  5. Costas Arkolakis & Svetlana Demidova & Peter J. Klenow & Andres Rodriguez-Clare, 2008. "Endogenous Variety and the Gains from Trade," American Economic Review, American Economic Association, vol. 98(2), pages 444-450, May.
  6. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
  7. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
  8. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
  9. Sugata Marjit & Arijit Mukherjee, 2015. "Endogenous Market Structure, Trade Cost Reduction, and Welfare," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 171(3), pages 493-511, September.
  10. Venables, Anthony J., 1985. "Trade and trade policy with imperfect competition: The case of identical products and free entry," Journal of International Economics, Elsevier, vol. 19(1-2), pages 1-19, August.
  11. Venables, Anthony J, 1987. "Trade and Trade Policy with Differentiated Products: A Chamberlinian-Ricardian Model," Economic Journal, Royal Economic Society, vol. 97(387), pages 700-717, September.
  12. Daniel M. Bernhofen, 2001. "Product differentiation, competition, and international trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(4), pages 1010-1023, November.
  13. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
  14. Vives, Xavier, 1985. "On the efficiency of Bertrand and Cournot equilibria with product differentation," Journal of Economic Theory, Elsevier, vol. 36(1), pages 166-175, June.
  15. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
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