Free Trade Agreement with Endogenous Market Structure
Lijun Pan and
Takatoshi Tabuchi
The Japanese Economic Review, 2019, vol. 70, issue 4, 426-445
Abstract:
We examine the incentives of free trade agreement (FTA) formation between two countries under endogenous market structure with leaders and followers. We demonstrate that establishing a FTA is neither an equilibrium outcome nor socially optimal when consumer demand and fixed cost are intermediate, products are close substitutes and countries are asymmetrical. This is because the FTA induces exit of followers, which makes the market less competitive and shrinks the leader’s production both in the domestic and foreign markets. We also show that large developing countries are less likely to establish a FTA than small developed countries.
Date: 2019
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https://doi.org/10.1111/jere.12214
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jecrev:v:70:y:2019:i:4:p:426-445
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