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Trade costs and multimarket collusion

Trade costs and multimarket collusion Contrary to conventional wisdom, this article argues that trade liberalization may facilitate collusion and reduce welfare. With the help of a duopoly model in which firms interact repeatedly in multiple markets, we first show that, if trade costs (i.e., tariffs/transport costs) and discount factors are not too high, efficient cartel agreements necessitate the cross‐hauling of goods, as that entails lower deviation incentives. In this setting, we then demonstrate that reciprocal trade liberalization always raises total output when trade costs are within a range whose lower bound exceeds a threshold level, but may reduce total output (and thus be pro‐collusive) when trade costs are below that threshold level. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Rand Journal of Economics Wiley

Trade costs and multimarket collusion

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References (14)

Publisher
Wiley
Copyright
© 2008, RAND
ISSN
0741-6261
eISSN
1756-2171
DOI
10.1111/j.1756-2171.2008.00051.x
Publisher site
See Article on Publisher Site

Abstract

Contrary to conventional wisdom, this article argues that trade liberalization may facilitate collusion and reduce welfare. With the help of a duopoly model in which firms interact repeatedly in multiple markets, we first show that, if trade costs (i.e., tariffs/transport costs) and discount factors are not too high, efficient cartel agreements necessitate the cross‐hauling of goods, as that entails lower deviation incentives. In this setting, we then demonstrate that reciprocal trade liberalization always raises total output when trade costs are within a range whose lower bound exceeds a threshold level, but may reduce total output (and thus be pro‐collusive) when trade costs are below that threshold level.

Journal

The Rand Journal of Economics – Wiley

Published: Dec 1, 2008

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