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Gains from variety? Product differentiation and the possibility of losses from trade under Cournot oligopoly with free entry

Collie, David Robert 2016. Gains from variety? Product differentiation and the possibility of losses from trade under Cournot oligopoly with free entry. Economics Letters 146 , pp. 55-58. 10.1016/j.econlet.2016.07.017

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Abstract

In a free-entry Cournot oligopoly model with a quadratic utility function that yields differentiated products, it is shown that there are losses from trade when the trade cost is close to the prohibitive level. Although the total number of varieties increases, there is a reduction in consumer surplus. This occurs because trade leads to an increase in imported varieties where consumer surplus is low due to the high trade cost and a decrease in domestically-produced varieties where consumer surplus is high. This result is in contrast with results from the free-entry Cournot oligopoly models with homogeneous products of Brander and Krugman (1983) Venables (1985); the monopolistic competition models such as Krugman (1980) and Venables (1987), and heterogeneous firm models such as Melitz (2003) and Melitz and Ottaviano (2008).

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor
Uncontrolled Keywords: Gains from trade; Trade liberalisation; Free entry; Cournot oligopoly; Product variety
Publisher: Elsevier
ISSN: 0165-1765
Last Modified: 20 Jan 2018 12:05
URI: http://orca.cf.ac.uk/id/eprint/92998

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