Trade Liberalization and the Degree of Competition in International Duopoly |
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Authors: | Damoun Ashournia Per Svejstrup Hansen Jonas Worm Hansen |
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Affiliation: | 1. Department of Economics, University of Copenhagen, , DK‐1353 Copenhagen K, Denmark;2. +45‐3533‐2271;3. Institute of Food and Resource Economics, University of Copenhagen, , DK‐1958 Frederiksberg C, Denmark;4. Danmarks Nationalbank, , Havnegade 5, DK‐1093 Copenhagen K, Denmark |
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Abstract: | This paper analyzes how a reduction in trade costs influences the possibility for firms to engage in international cartels, and hence how trade liberalization affects the degree of competition. We consider a particular intra‐industry trade model amended to allow for firms producing differentiated products. Our main finding is that trade liberalization may have an anti‐competitive effect. We find that there is no unique relation between a reduction in trade costs and the degree of competition. When products are differentiated, a lowering of trade costs is pro‐competitive if trade costs are initially high, but anti‐competitive if trade costs initially are low. Hence, trade policy is not necessarily a substitute for competition policy. |
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