Product differentiation and the gains from trade under Bertrand duopoly

Abstract

In the literature on the welfare effects of free trade under imperfect competition, one important case seems to have been overlooked, and that is the Bertrand duopoly model with differentiated products. Although many authors have analysed the welfare effects of free trade under Cournot duopoly and demonstrated the possibility of losses from trade, there has been no thorough analysis of the welfare effects of free trade under Bertrand duopoly. In this article we present a thorough analysis of the welfare effects of free trade under Bertrand duopoly with differentiated products, and it is shown that there are always gains from trade. JEL Classification: F12