International trade, differentiated goods, and strategic asymmetry

Abstract

We scrutinize international trade arising from oligopolistic rivalry (reciprocal dumping) in a model where the goods are horizontally differentiated and where otherwise symmetric firms located in different regions adopt asymmetric strategies-one competing in prices and the other competing in quantities. Unidirectional and intra-industry trade appear endogenously in our framework. We show that as trade costs decline the equilibrium outcome will transition from autarky through a region of unidirectional trade, before intra-industry trade ultimately arises.In the unidirectional trade region, potential market entry by the rival has an impact on firm behavior even though the rival is not exporting. The implications of product differentiation and changing trade costs for trade volumes and for the gains from trade are asymmetric in general. Welfare may rise monotonically as trade costs fall for one of the economies, but will necessarily fall initially relative to autarky for the other.

Foreign market entry, upstream market power, and endogenous mode of downstream competition

“…Such asymmetric strategies have been observed also among exporters of mass-produced versus custom-made goods (Schroeder & Tremblay, 2015;Schroeder & Tremblay, 2016), as well as in the market for small cars and in the aerospace connector industry in the United States (Tremblay & Tremblay, 2011), and in the Japanese home electronics industry (Sato, 1996). See, Gilbert et al (2022) for further details on the anecdotal and indirect evidence reported by the literature. 3 See Grassman (1973) for evidence on invoicing practices of exporters in the context of bilateral trade between Sweden and the U.S.; Magee (1974) on the currency of denomination of contracts of Japanese and German exporting firms to the U.S.; Page (1977) and Carse et al (1980) on invoicing practices of British exporters; and Van Nieuwkerk (1979) on invoicing practices of Dutch exports and imports.…”

“…Foreign market entry modes and the corresponding welfare implications are, however, not considered. Gilbert et al (2022) have demonstrated that analyzing asymmetric choices in strategic variables in the context of international trade is important.…”

“…Foreign market entry modes and the corresponding welfare implications are, however, not considered. Gilbert et al (2022) have demonstrated that analyzing asymmetric choices in strategic variables in the context of international trade is important. By the same token, Gilbert et al (2020) show that both trade costs and product quality are crucial explanations for strategic asymmetry between exporting firms and their local rivals.…”

“…Such asymmetric strategies have been observed also among exporters of mass‐produced versus custom‐made goods (Schroeder & Tremblay, 2015; Schroeder & Tremblay, 2016), as well as in the market for small cars and in the aerospace connector industry in the United States (Tremblay & Tremblay, 2011), and in the Japanese home electronics industry (Sato, 1996). See, Gilbert et al (2022) for further details on the anecdotal and indirect evidence reported by the literature.…”

Trade openness, global competitiveness, and catching up between the European Union countries

“…According to Foster (2008), countries can benefit from liberalisation most in the long run, but they can suffer from short-run adverse effects of liberalisation. The effects of product differentiation and changing trade costs for trade intensity are asymmetric (Gilbert et al , 2022).…”