Gains and losses from unilateral free trade under oligopoly
No 1996024, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)
This paper analyses unilateral trade liberalisation in a Cournot duopoly model where the domestic and the foreign firm have different marginal costs. There are three results in the paper. Firstly, with linear demand, it is shown that the domestic country will lose as a result of unilateral free trade unless the foreign firm has a significant cost advantage. Secondly, it is shown that a sufficient condition for there to be gains from unilateral free trade is that the domestic firm is so uncompetitive that it ceases production under free trade. This result is generalised to the case of a Cournot oligopoly with non-linear demand. Thirdly, it is shown that there will always be gains from unilateral free trade with constant elasticity demand functions whatever the elasticity of demand or the relative costs of the domestic and foreign firms.
JEL-codes: F12 F13 L13 (search for similar items in EconPapers)
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