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Perfect Competition and Intra-Industry Trade


  • Ernest Aksen
  • Jacek Cukrowski


The paper presents a formal study of how risk aversion can be applied to analysis of international trade. It seeks to illustrate, amongst other things, that risk-averse firms operating in perfectly competitive markets with uncertainty of demand tend to diversify markets and that this provides the basis for international trade in identical commodities between identical countries. The paper argues that such trade may be welfare-improving, despite efficiency losses due to cross-hauling and transportation costs. Moreover, the analysis shows that reduction of tariff per unit of imported goods (e.g., due to the organization of custom unions) increases trade flows but does not necessarily improve total welfare. Therefore, in some particular cases, the use of sophisticated government intervention can lead to better outcomes than can free trade. 5

Suggested Citation

  • Ernest Aksen & Jacek Cukrowski, 2001. "Perfect Competition and Intra-Industry Trade," CASE-CEU Working Papers 0040, CASE-Center for Social and Economic Research.
  • Handle: RePEc:sec:ceuwps:0040

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    References listed on IDEAS

    1. 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.
    2. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
    3. Appelbaum, Elie & Katz, Eliakim, 1986. "Measures of Risk Aversion and Comparative Statics of Industry Equilibrium," American Economic Review, American Economic Association, vol. 76(3), pages 524-529, June.
    4. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-291, June.
    5. Brander, James A., 1981. "Intra-industry trade in identical commodities," Journal of International Economics, Elsevier, vol. 11(1), pages 1-14, February.
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    Cited by:

    1. Gormsen, Christian, 2009. "Intransparent Markets and Intra-Industry Trade," Working Papers 09-20, University of Aarhus, Aarhus School of Business, Department of Economics.


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