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Free Trade Agreement with Endogenous Market Structure

Author

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  • Lijun Pan

    (Nanjing University)

  • Takatoshi Tabuchi

    (Faculty of Economics, The University of Tokyo)

Abstract

We examine the incentives of free trade agreements (FTA) formation between two countries under endogenous market structure with leaders and followers. We demonstrate that establishing an FTA is neither an equilibrium outcome nor social optimum when consumer demand and fixed cost are intermediate and products are close substitutes. This is because the FTA induces exit of followers, which makes the market less competitive and shrinks the leader's production both in the domestic and foreign markets. We also show that developing countries are less likely to establish an FTA than developed countries.

Suggested Citation

  • Lijun Pan & Takatoshi Tabuchi, 2018. "Free Trade Agreement with Endogenous Market Structure," CIRJE F-Series CIRJE-F-1089, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2018cf1089
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    References listed on IDEAS

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    Cited by:

    1. Lijun Pan & Yongjin Wang, 2020. "Competition among Large and Heterogeneous Small Firms," Papers 2005.14442, arXiv.org.
    2. Pan, Lijun & Wang, Yongjin, 2020. "Competition among large and heterogeneous small firms," Economics Letters, Elsevier, vol. 196(C).

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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