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Trade Liberalization and Imperfect Competition: A Welfare Analysis

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  • Eldor, Rafael
  • Levin, Dan

Abstract

This paper identifies sufficient conditions for an increase/decrease in a country's welfare due to partial trade liberalization where the domestic industry is characterized by a monopoly or Cournot oligopoly. Different trade restrictions are considered. Those are quotas imposed by the foreign country (VERs), quotas imposed by domestic country and tariffs. In the case of VERs, welfare unambiguously decreases when the first unit of trade is introduced into the economy. It is shown that the decrease in welfare due to additional import under VERs may take place for a substantial range. On the other hand, as we leave free trade position to restrict the last unit of trade, under VER, welfare unambiguously decreases even in the large country case. In the case of quotas, if the domestic marginal cost is greater or equal than the foreign price cum transportation cost, then importing country's welfare rises due to additional import. When he marginal cost is lower than the foreign price cum transportation cost, and export is not possible, then welfare may decrease with additional import. Thus, in general, there is no monotonic relationship between the reduction in the degree of quota (both export and import quota) and importing country's welfare. In the case of tariffs, as the tariff is reduced from the prohibitive rate, welfare rfses.
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Suggested Citation

  • Eldor, Rafael & Levin, Dan, 1986. "Trade Liberalization and Imperfect Competition: A Welfare Analysis," Foerder Institute for Economic Research Working Papers 275418, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275418
    DOI: 10.22004/ag.econ.275418
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    References listed on IDEAS

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    1. Baldwin, Robert E. & Mutti, John H. & Richardson, J. David, 1980. "Welfare effects on the United States of a significant multilateral tariff reduction," Journal of International Economics, Elsevier, vol. 10(3), pages 405-423, August.
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    Cited by:

    1. Dani Rodrik, 1988. "Imperfect Competition, Scale Economies, and Trade Policy in Developing Countries," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 109-144, National Bureau of Economic Research, Inc.

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