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Bottled Water - A Case of Pointless Trade?

Richard Friberg and Mattias Ganslandt ()

No 4145, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Two-way trade in (almost) homogenous products has ambiguous welfare effects if entry is restricted. We examine Swedish imports of bottled water to investigate whether transport cost losses from trade outweigh the partial equilibrium gains from trade (stronger competition and more brands to choose from). Using monthly data for all brands sold in stores during 1998-2001 we estimate a structural model of demand. Assuming one-shot Bertrand competition by multibrand firms, we can use the estimated model to uncover marginal costs. We simulate the effect on consumer and producer surplus of banning imports, finding that banning imports would decrease overall welfare. Expanded choice is the main benefit of trade and disregarding this the net welfare effect of imports in this market are approximately zero - the pro-competitive effect is of the same size as the cost savings associated with replacing foreign, higher cost, suppliers with domestic. Given our choice of market this suggests we should not be overly concerned with the welfare effects of two-way trade in consumer goods that are close to homogenous.

Keywords: intra-industry trade; nested logit models; reciprocal dumping (search for similar items in EconPapers)
JEL-codes: F12 F14 L13 L66 (search for similar items in EconPapers)
Date: 2003-12
New Economics Papers: this item is included in nep-com
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