Endogenous market structures in international trade (natura facit saltum)

Abstract

Almost all of the large literature on international trade with imperfect competition assumes exogenous market structures. The purpose of this paper is to develop a simple model that generates alternative market structures as Nash equilibria for different parameterizations of the basic model. Equilibrium market structure is a function of the underlying technology. Familiar configurations such as a duopoly competing in exports or a single multinational producing in both markets arise as special cases. Small tax-policy changes can produce large welfare effects as the equilibrium market structure shifts, implying discontinuous jumps in prices, quantities, and profits.