A Note on Production Efficiency in Oligopolistic Trade Models

In a two‐country segmented markets model with homogeneous product Cournot oligopoly we show that production efficiency improves in the free‐trade regime compared to autarky, if autarky price in each country is lower than both the post‐trade prices—which holds, for example, when preferences are identical. The result holds irrespective of the demand structure, number, and cost distribution of firms in the two countries. The improvement in production efficiency lowers average cost of production which, for some parameterizations, gives rise to higher aggregate profits for all countries in the free‐trade regime (compared to autarky). Though free trade (zero tariffs) improves production efficiency from autarky (prohibitive tariffs), freer trade is not always associated with greater production efficiency.