Tacit Collusion over Foreign Direct Investment under Oligopoly
No E2009/8, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section
A two-country model of the FDI versus export decisions of firms is analysed. The analysis considers both the Cournot duopoly and the Bertrand duopoly models with differentiated products. It is shown that the static game is often a prisoners' dilemma where both firms are worse off when they both undertake FDI. To avoid the prisoners' dilemma, in an infinitely-repeated game, the firms can collude over their FDI versus export decisions. Then, a reduction in trade costs may lead firms to switch from exporting to undertaking FDI when trade costs are relatively high. Also, collusion over FDI may increase welfare.
Keywords: Collusion; Trade Liberalisation; Foreign Direct Investment; Cournot Oligopoly; Bertrand Oligopoly; Infinitely-Repeated Game (search for similar items in EconPapers)
JEL-codes: F12 F23 L13 L41 M16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-int and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:cdf:wpaper:2009/8
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