Trade Liberalization and Cartel Stability
Will reduced trade barriers increase or reduce the chance that the producers in an international duopoly reach a collusive agreement about not exporting into each others domestic markets? Reduced trade costs increase the short-run gains from deviating from a collusive agreement, but can also make the long-run punishment of such a strategy harsher. In a model where collusion on prices are supported by a trigger strategy, we find a reduction in trade costs weakens competition in the sense that collusion is easier to sustain.
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