Trade liberalization, forward‐looking firms, and welfare

We set up an oligopolistic model with two exporting firms selling to a third market to investigate the welfare implications of trade liberalization when the exporting firms are forward‐looking. The results show that with cost asymmetry trade liberalization encourages the exporting firms to engage in...

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Bibliographic Details
Published in:Review of international economics 2017-11, Vol.25 (5), p.999-1016
Main Authors: Kao, Kuo‐Feng, Peng, Cheng‐Hau
Format: Article
Language:English
Subjects:
Collusion
Companies
Economic models
F12
F13
Trade liberalization
Welfare
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Summary:We set up an oligopolistic model with two exporting firms selling to a third market to investigate the welfare implications of trade liberalization when the exporting firms are forward‐looking. The results show that with cost asymmetry trade liberalization encourages the exporting firms to engage in tacit collusion, which may not only be detrimental to the domestic welfare, but also to the consumer surplus of the importing country. Moreover, we find that tacit collusion is less sustainable if the government of the importing country imposes a lower (higher) tariff on the more (less) efficient exporting firm. If a nonforward‐looking or a forward‐looking cost‐efficient domestic firm exists in the importing country, then trade liberalization also encourages tacit collusion.
ISSN:0965-7576
1467-9396
DOI:10.1111/roie.12293