Hierarchical Trade and Endogenous Price Distortions

Hans Gersbach and Hans Haller
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Hans Haller: Department of Economics, Virginia Polytechnic Institute and State University, Blacksburg VA, USA

No 07/72, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: We study the allocation of commodities through a two-stage hierarchy of competitive markets. Groups or countries trade at global prices while individuals within a group trade at local prices. We identify the free trade and the autarky equilibrium as polar cases. We show that no other two-stage market equilibria exist if the commodity space is two-dimensional. An example demonstrates that other, so-called intermediate equilibria exist for three-dimensional commodity spaces. The example also exhibits endogenous price distortions in third countries when some countries follow distortionary trade policies. We give two existence proofs for intermediate equilibria in higher dimensions. Each proof provides an explicit construction of special classes of intermediate equilibria.

Pages: 36 pages
Date: 2007-09
New Economics Papers: this item is included in nep-int
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