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Gains and losses from unilateral free trade under oligopoly

Published online by Cambridge University Press:  17 August 2016

David R. Collie
David R. Collie*
Affiliation:
Cardiff Business School, University of Wales
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Summary

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.

Résumé

Résumé

Cet article étudie la libéralisation unilatérale du commerce dans le cadre d’un modèle de Cournot où les firmes des différents pays ont des coûts marginaux différents. Cet article contient trois résultats. Premièrement, avec des fonctions de demandes linéaires, il est montré que la firme nationale serait perdante lors d’une libéralisation unilatérale du commerce, à moins que la firme étrangère ait un avantage en coût significatif. Deuxièmement, il est montré qu’une condition suffisante pour que la libéralisation unilatérale du commerce soit bénéfique est que la firme nationale soit tellement non-compétitive qu’elle cesse toute activité lors du libre échange. Ce résultat est généralisé aux cas avec des fonctions de demandes non linéaires. Troisièmement, il est montré que la libéralisation unilatérale du commerce est toujours avantageuse dans le cas où la demande a une élasticité constante, et ce quelque soit sa valeur et peu importe l’écart relatif entre les coûts des différentes firmes.

Keywords

F12F13L13F12F13L13
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 62 , Issue 2 , 1996 , pp. 191 - 202
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1996 

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Footnotes

(*)

I would like to thank two anonymous referees for their helpful comments and suggestions. I am responsible for any errors that remain.

References

REFERENCES

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