Trade liberalization in a differentiated duopoly reconsidered

Constructing a model of differentiated Cournot duopoly, we consider welfare effects of trade liberalization (i.e. reductions in transport costs). We examine both multilateral trade (i.e. the firms in both countries export bilaterally) and unilateral trade, under which foreign entry is possible but the home firm cannot export. Some new results on trade gains under differentiated oligopoly are proved and their implications are discussed.     

Foreign Direct Investment and the Unionization Rate

Technological innovations improve the welfare of a country facing fixed terms of trade, but may lead to immiserization when the terms of terms of trade are adversely affected. This paper establishes that transport innovation can be immiserizing for a small country when the transport sector exhibits variable returns to scale. The release of resources from the transport sector triggers Rybczynski-like effects, and the resulting expansion (contraction) in the volume of trade and in the demand for transport services raises unit costs of these services, and may reduce welfare in the presence of decreasing (increasing) returns to scale. [411]     

The Economic Efficiency of Policy Reform and Partial Market Liberalization under Transaction Costs

The article presents an integrated analysis of the effects of domestic and trade policy reform on resource allocation and welfare under transaction costs. It develops a general multiagent, multicommodity model, where transaction costs are the costs of resources used in the exchange process. The influence of domestic and trade policy (including both price and quantity instruments) on distorted market equilibrium is analysed. Alternative concepts of distorted equilibrium are presented and investigated. They provide a basis for evaluating the effects of multilateral partial market liberalization on resource allocation and welfare under transaction costs. New conditions are derived under which multilateral policy reforms generate Pareto improvements.     

Parallel Trade and its Ambiguous Effects on Global Welfare

The regulation of parallel trade is a fiercely debated issue in the global trading system. This paper investigates the welfare effects of parallel trade freedom for different levels of trade costs and market size. It is found that parallel trade freedom has a positive effect on global welfare if countries are sufficiently heterogeneous in terms of market size and trade costs are sufficiently low. Contrary to intuition, this result even holds in a situation where parallel trade freedom implies the closure of the smaller market. If, however, countries are virtually homogenous in terms of market size, parallel trade freedom may be detrimental to global welfare for specific levels of trade costs.     

Market Integration and Competition in Environmental and Trade Policies

Recent empirics suggest the relevance of transport cost reductions for world trade growth along with eliminations in protectionist trade barriers. To address the welfare effects of trade cost reductions in a context of ??trade and the environment,?? we develop a two-stage game model where governments choose environmental and trade policies and firms play a Cournot-Nash game. We show that reductions in transport costs lead to lower emission taxes and higher tariffs. And, we find that the degree of pollution damage plays a central role in whether market integration is welfare-improving relative to autarky.     

Strategic Environmental Policies and the Gains from Trade Liberalization

The literature on strategic environmental policy has not fully addressed welfare effects of trade liberalization from autarky. In a reciprocal market model of duopoly with transboundary pollution, we study how reductions in transport costs and import tariffs affect the Nash‐equilibrium welfare of an environmental policy game as compared to any initial state including autarky. We show three patterns of gainfulness of trade depending on the interaction between marginal damage from pollution and the degree of transboundary pollution.     

Additive versus multiplicative trade costs and the gains from trade liberalizations

This paper addresses welfare effects from trade liberalization in a Melitz ( 2003 ) heterogeneous‐firms trade model including the empirically important per‐unit (i.e., additive) trade costs in addition to the conventional iceberg (i.e., multiplicative) and fixed trade costs. The novel contribution of the paper is the result that the welfare gain for a given increase in trade openness is higher for reductions in per‐unit (additive) trade costs than for reductions in iceberg (multiplicative) trade costs. The ranking derives from differences in intra‐industry reallocations and, in particular, from dissimilar impacts on the number of exporters (i.e., the extensive margin of trade).     

Countries, regions and trade: On the welfare impacts of economic integration

We study the impact of falling international trade costs and falling national transport costs on the economic geography of countries involved in an integration process. Each country is formed by two regions between which labor is mobile, whereas there is no international mobility. Goods can be traded both nationally and internationally at positive, but different, costs. A decrease in trade costs and/or in transport costs has a direct impact on prices and wages, which allows us to account for the impact of changes in these parameters on the economic geography and welfare of each country. We show that, as trade barriers fall, the benefits of integration come after its costs. We also show that national transport policies are of the beggar-thy-neighbor type. On both counts, policy coordination is required in the process of economic integration.     

PRODUCTIVITY IMPROVEMENTS AND FALLING TRADE COSTS: BOON OR BANE?*

This article looks at two features of globalization, namely, productivity improvements and falling trade costs, and explores their effect on welfare in a monopolistic competition model with heterogenous firms and technological asymmetries. Contrary to received wisdom, and for reasons different from adverse terms of trade effects, it is shown that improvements in a partner's productivity must hurt us. Moreover, falling trade costs can raise welfare in the technologically advanced country while reducing it in the backward one, if technological asymmetries are large enough.     

Trade,foreign direct investment or acquisition: Optimal entry modes for multinationals

We examine multinationals' optimal entry modes into foreign markets as a function of market size, FDI fixed costs, tariffs and transport costs. Our results highlight why large countries are more likely to attract acquisition investment, while intermediate sized countries may be served predominantly through trade, even in the presence of high tariffs. Small countries are most likely to experience either FDI or no entry. We also show how these results vary with the competition intensity in the host country.FDI fixed costs, tariffs and transport costs are crucial not only in determining whether to engage in FDI or trade, but they are also shown to influence the acquisition choice as trade and FDI threats influence the acquisition price. Finally, we explore the welfare implications of tariff reductions for both the local firm and the multinational and investigate political motives to impose endogenous tariffs that influence not only the welfare of a local firm, but also the entry mode of the multinational.     

The Effects of Trade Liberalization between Heterogeneous Countries on Endogenous Mergers

This paper examines the effects of trade liberalization on merger behavior. We endogenize merger choice among owners in an oligopolistic industry in asymmetric countries to analyze the consequences of trade cost reductions on competitiveness and welfare. In this context, the non‐cooperative game supports asymmetric market structures. We also find that trade liberalization is not necessarily pro‐competitive in countries with the competitive advantage, even if trade costs are completely abolished. Moreover, the tariff‐jumping explanation of international mergers does not necessarily apply. The welfare analysis shows that merger behavior can significantly alter any gains from liberalization. Countries should consider enforcing competition in regional agreements. Specifically, to avoid a reduction in domestic welfare following trade‐liberalizing reductions in trade costs, a high‐cost country's optimal policy may be to ban international mergers.     

Markups,quality, and transport costs

This paper provides new evidence on trade prices based on firm-level data from France. It shows that firms charge higher free-on-board (net of transportation costs, hereafter noted as fob) unit values on exports to more distant countries. This finding holds within firms and products, and across destinations. The price premium paid by distant consumers is due to firms charging higher fob prices, and to higher transportation costs. A simple decomposition of the elasticity of import prices to distance shows that, after a fall in transport costs, almost 80% of the decline in import prices enjoyed by consumers is due to firms charging lower fob prices. This suggests a new channel through which changes in transport costs may affect welfare.     

Trade,Strategic Environmental Policy,and Global Pollution

This paper examines the effects of international trade in a model with global pollution that accumulates over time because of production emissions in each country. If countries cooperatively determine their environmental policies, autarky and free trade in the absence of trade costs generate the same optimal solution. By contrast, if environmental policies are determined noncooperatively, the effects of trade on global pollution and welfare are ambiguous because policy games can result in multiple equilibria. Although trade increases both the lower and upper bounds of the pollution stock, whether trade expands the range of possible steady‐state pollution levels is ambiguous. The analysis then extends to consider trade costs.     

STAY OR LEAVE? CHOICE OF PLANT LOCATION WITH COST HETEROGENEITY

Using a two-country model, we examine location choices by two domestic firms when they serve only the domestic market and their cost structures differ. The findings indicate that whether the firm that has a greater incentive for foreign direct investment is more or less efficient depends on the differences in domestic and foreign marginal costs, trade costs, and the presence of fixed costs. Plant locations may not be uniquely determined. In particular, a small change in trade costs may reverse plant location. Moreover, a decrease in transport costs in the presence of foreign direct investment may deteriorate domestic welfare.     

Foreign market entry,upstream market power,and endogenous mode of downstream competition

In a differentiated duopoly model of trade and FDI featuring both horizontal and vertical product differentiation, we examine whether globalization and trade policy measures can generate welfare gains by leading firms to change their mode of competition. We show that when a high-quality foreign variety is manufactured under large frictions due to upstream monopoly power, a foreign firm can become a Bertrand competitor against a Cournot local rival in equilibrium, especially when the relative product quality of the foreign variety is sufficiently high and trade costs are sufficiently low (implying higher input price distortions due to double marginalization). Our results suggest that such strategic asymmetry is welfare improving and that the availability of FDI as an alternative to trade can make welfare-enhancing strategic asymmetry even more likely, especially when both input trade costs and fixed investment costs are sufficiently low and trade costs in final goods are sufficiently large.     

Market entry and trade weighted import costs

Trade weighting is a common method of aggregating trade frictions. It will understate changes in these costs when there are non‐ad valorem trade costs and quality differences. Newly traded goods enter at higher trade costs than previously traded ones. Lower import costs shift trade to low‐quality goods with higher measured trade costs. These effects are quantitatively important. U.S. import costs fall more than twice as fast as trade weighted measures from 1974 to 2004 after the impact of shifting quality and newly traded goods is accounted for. Empirical estimates that use trade weighting will underestimate the welfare impact of trade costs.     

Minimum Quality Standards and International Trade

This paper investigates the impact of a non‐discriminating minimum quality standard (MQS) on trade and welfare when the market is characterized by imperfect competition and asymmetric information. A simple partial equilibrium model of an international Cournot duopoly is presented in which a domestic and a foreign firm are identical except that the foreign firm faces positive transport costs. Asymmetric information generates a market failure, which the government attempts to alleviate with a MQS. It is found that although firms face the exact same costs of compliance, they will generally prefer different levels of regulation. As a result, international trade disputes are likely to arise even when regulation is non‐discriminating.     

The Interaction Between Technology Adoption and Trade When Firms are Heterogeneous

This paper develops a monopolistic competition model with heterogeneous firms to study the interaction between technology adoption and trade in a world of two countries facing different technology adoption costs. It shows that a reduction in the technology adoption cost in one country increases productivity, induces more firms to adopt advanced technology, and improves welfare in this country, while decreasing productivity, inducing more firms to switch back to old technology, and reducing welfare in the other country. Furthermore, although a reduction in transport costs always makes the country with the lower adoption cost better off, it can hurt the other country.     

Product differentiation and the gains from trade under Bertrand duopoly

Abstract.  In the literature on the welfare effects of free trade under imperfect competition, one important case seems to have been overlooked, and that is the Bertrand duopoly model with differentiated products. Although many authors have analysed the welfare effects of free trade under Cournot duopoly and demonstrated the possibility of losses from trade, there has been no thorough analysis of the welfare effects of free trade under Bertrand duopoly. In this article we present a thorough analysis of the welfare effects of free trade under Bertrand duopoly with differentiated products, and it is shown that there are always gains from trade. JEL Classification: F12     

Free Entry, Quasi-Free Trade, and Strategic Export Policy

This paper analyzes governments' choices between strategic export subsidies and free trade as a commitment when firms are free to enter or exit in response to these choices. Entry and exit is treated as a discrete process. Within the context of a four-stage game, two types of equilibria emerge: a quasi-free-trade equilibrium in which one of the two governments commits to free trade, while the other has a Nash equilibrium subsidy that is zero and bilateral export subsidies. Concerning welfare effects, if fixed costs are large enough, both countries achieve a welfare gain relative to free trade.