Membership in Two Customs Unions

Murat Sertel and Muhamet Yildiz ()

No 9627, Working Papers from Economic Research Forum

Abstract: Under certain membership property rights obeying the 'liberal ethic' and 'approved entry' axioms, we define three-stage games where the last two stages of non-cooperative tariff setting game and subsequent Cournotian competition are preceded by the formation of customs unions or free trade areas. We refine Markov-perfection for both games. We call a Markov-perfect equilibrium of a free trade agreement game enhanced if no country would have an incentive to deviate from its declared list of free trade areas, even if each existing free trade area were willing to accept it. We also call a Markov-perfect equilibrium of a customs union game stable if no country has an 'acceptable' proposal to the others and resulting in a better outcome for itself. We show that, although uniform customs unions are disjoint, a country may be a member in two distinct customs unions (resp., free trade areas) in a stable (resp., enhanced) Markov-perfect equilibrium of a customs union (resp., free trade agreement) game.

Date: 1996-19-09, Revised 1996
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Published by The Economic Research Forum (ERF)

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