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Hierarchical Trade and Endogenous Price Distortions

We study the allocation of commodities through a two-stage hierarchy of competitive markets. Groups or countries trade at global prices while individuals within a group trade at local prices. We identify the free trade and the autarky equilibrium as polar cases. We show that no other two-stage market equilibria exist if the commodity space is two-dimensional. An example demonstrates that other, so-called intermediate equilibria exist for three-dimensional commodity spaces. The example also exhibits endogenous price distortions in third countries when some countries follow distortionary trade policies. We give two existence proofs for intermediate equilibria in higher dimensions. Each proof provides an explicit construction of special classes of intermediate equilibria.

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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 07/72.

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Length: 36 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:eth:wpswif:07-72
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  1. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier.
  2. Casella, Alessandra & Frey, Bruno, 1992. "Federalism and clubs : Towards an economic theory of overlapping political jurisdictions," European Economic Review, Elsevier, vol. 36(2-3), pages 639-646, April.
  3. Anderson, James E & Neary, J Peter, 1993. "Domestic Distortions and International Trade," CEPR Discussion Papers 786, C.E.P.R. Discussion Papers.
  4. Frank Verboven, 1996. "International Price Discrimination in the European Car Market," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 240-268, Summer.
  5. Matthias Lutz, 2004. "Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 456-475, 08.
  6. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May.
  7. Thorsten Hens, 1997. "Exchange rates and perfect competition," Journal of Economics, Springer, vol. 65(2), pages 151-161, June.
  8. Hatta, Tatsuo & Fukushima, Takashi, 1979. "The welfare effect of tariff rate reductions in a many country world," Journal of International Economics, Elsevier, vol. 9(4), pages 503-511, November.
  9. Haller, Hans & Holden, Steinar, 1997. "Ratification Requirement and Bargaining Power," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 825-51, November.
  10. Turunen-Red, Arja H & Woodland, Alan D, 1991. "Strict Pareto-Improving Multilateral Reforms of Tariffs," Econometrica, Econometric Society, vol. 59(4), pages 1127-52, July.
  11. Gersbach, Hans & Haller, Hans, 2010. "Hierarchical Trade," CEPR Discussion Papers 7764, C.E.P.R. Discussion Papers.
  12. Harry Flam, 1992. "Product Markets and 1992: Full Integration, Large Gains?," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 7-30, Fall.
  13. Fukushima, Takashi & Kim, Namdoo, 1989. "Welfare improving tariff changes : A case of many goods and countries," Journal of International Economics, Elsevier, vol. 26(3-4), pages 383-388, May.
  14. Ethier, Wilfred J., 1984. "Higher dimensional issues in trade theory," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 3, pages 131-184 Elsevier.
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