DP1326 Country Asymmetries, Endogenous Product Choice and the Speed of Trade Liberalization

Author(s): Antonio Cabrales, Massimo Motta
Publication Date: February 1996
Keyword(s): Country Size, International Trade, Product Differentiation, Trade Liberalization
JEL(s): F12, F15
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1326

We analyse the effects of trade liberalization on firms' decisions and profits, and on consumers' welfare, in a product differentiation model with countries of different size. Firms decide product specifications at the beginning of the game, in which autarky is followed by trade liberalization (whose date is anticipated). Despite the heterogeneity, the highest level of welfare is attained for both countries when trade opens immediately. The impact on firms' profits can differ, however. Small country's firms benefit from larger market size but are disadvantaged when the scale of the home market affects the product choice decision. The opposite is true for the firm located in the large country.