Reciprocal Dumping With Product Differentiation
20 Pages Posted: 21 Mar 2007
Date Written: March 8, 2007
This paper examines if international trade can reduce total welfare in an international oligopoly with differentiated goods. We show that welfare is a U-shaped function in the trade cost as long as trade occurs in equilibrium, hence a marginal reduction of trade costs that increases trade may reduce welfare. We also show that international trade can reduce welfare compared to autarky in a Cournot model for any degree of product differentiation and in a Bertrand model when the local markets are sufficiently competitive and products are sufficiently close substitutes.
Keywords: reciprocal dumping, intra-industry trade, oligopoly, product differentiation, transport costs
JEL Classification: F12, F15, L13
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