Mixed Strategy Trade Equilibria

Michael Baye and Casper de Vries

Canadian Journal of Economics, 1992, vol. 25, issue 2, 281-93

Abstract: Two major paradigms prevail in trade theory: perfect competition and monopolistic competition. In the former case, only prices are important whereas product characteristics are important in the latter case. In both instances, pure-strategy equilibria exist. This paper considers the hybrid situation where some customers care only about the price while others have a brand preference or care about product characteristics. It is shown that an equilibrium in pure strategies does not exist but that a mixed-strategy equilibrium does exist. This in turn implies endogenous uncertainty in the pattern, terms, and the gains from trade.

Date: 1992
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