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Journal of Economic Integration 2005 June;20(2) :294-317.
Trading Blocs and Market Performance under Duopolistic Competition

R. Scott Hacker Qaizar Hussain 

Jönköping International Business School, Jönköping, Sweden
International Monetary Fund
Copyright ©2005 Journal of Economic Integration

This paper uses a three-country duopoly model to examine the effects of lowered trade barriers when a new entrant joins a trading bloc. There are two firms - a small-country firm and a large-country firm within the bloc - and three markets -two within and one (new entrant) outside the bloc. The results from trade bloc expansion vary for when marginal cost is falling with respect to output, but are clear when marginal cost is rising. In the latter case, profits improve more for the small-country firm than for the large-country firm. Consequences on prices, production, and trade are also considered.

JEL Classifications: F15, F10, D43, D60

Keywords: Trading Blocs | Trade Barriers | Trade Expansion | Duopoly | Oligopoly | Tariffs | Preferential Trade Arrangement | Free Trade Area | Reciprocal Dumping
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