Discussion Paper Details

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Title: When the Threat is Stronger than the Execution: Trade and Welfare under Oligopoly

Author(s): Dermot Leahy and J Peter Neary

Publication Date: July 2020

Keyword(s): Cournot and Bertrand Competition, Cross-Hauling, Nimzowitsch Region, Oligopoly and trade and trade liberalization

Programme Area(s): Industrial Organization and International Trade and Regional Economics

Abstract: We compare trade liberalization under Cournot and Bertrand competition in reciprocal markets. In both cases, the critical level of trade costs below which the possibility of trade affects the domestic firm's behavior is the same; trade liberalization increases trade volume monotonically; and welfare is U-shaped under reasonable conditions. However, welfare is typically greater under Bertrand competition; for higher trade costs the volume of trade is greater under Cournot competition, implying a "van-der-Rohe Region" in parameter space; and, for even higher trade costs, there exists a "Nimzowitsch Region", where welfare is higher under Bertrand competition even though no trade takes place.

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Bibliographic Reference

Leahy, D and Neary, J. 2020. 'When the Threat is Stronger than the Execution: Trade and Welfare under Oligopoly'. London, Centre for Economic Policy Research.