On the Fragility of Gains from Trade Under Continuously Differentiated Bertrand Competition

Abstract

One of the most widely accepted principles of economics is the existence of gains from trade for every nation under certain conditions including perfect competition. In the last twenty years, trade economists have revolutionized the field by firmly establishing the possibility of modeling imperfectly competitive international markets. Despite this development, most still agree there are good reasons to believe that gains from trade are still present. However, we show that in the absence of international redistributions the presence of a positive profit sector in a general equilibrium model can lead to a situation in which some nations may lose from the reduction of international trade barriers.

Keywords: gains from trade, imperfectly competitive international markets, international price Nash duopoly, continuously differentiated Bertrand competition

JEL Classification: D43, F00, F10, F12