DP9 | International Trade in Identical Commodities: Cournot Equilibrium with Free Entry


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The paper analyses intra-industry trade between economies containing an imperfectly competitive industry in which firms produce a homogeneous output, production is subject to increasing returns to scale, and there is free entry and exit of firms. Trade is shown to unambiguously increase welfare by reducing the degree of monopoly in each market, and increasing firm size. The effects of differences in technology and endowments on the pattern of trade and welfare are examined. Import tariffs are shown to raise welfare in the country employing the tariff, and the welfare implications of various types of industry subsidy are examined.