DP5023 Reciprocal Dumping with Bertrand Competition

Author(s):	Richard Friberg, Mattias Ganslandt
Publication Date:	April 2005
Keyword(s):	intra-industry trade, oligopoly, product differentiation, reciprocal dumping, transport costs
JEL(s):	F12, F15, L13
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=5023

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 transport cost as long as trade occurs in equilibrium. With a Cournot duopoly trade can reduce welfare compared to autarky for any degree of product differentiation. Under Bertrand competition we show that trade may reduce welfare compared to autarky, if firms produce sufficiently close substitutes and the autarky equilibrium is sufficiently competitive. Otherwise it cannot.