When the threat is stronger than the execution: trade and welfare under oligopoly

Abstract

We compare the effects of changes in trade costs on trade volumes and on the gains from trade under Cournot and Bertrand competition. In both cases, the threshold trade costs below which the possibility of trade affects the domestic firm's behavior is the same; and welfare is U-shaped under reasonable conditions. However, welfare is typically greater under Bertrand competition; for higher trade costs the volume of trade is greater under Cournot competition, implying a “van-der-Rohe Region”; and, for even higher trade costs, there exists a “Nimzowitsch Region”, where welfare is higher under Bertrand competition even though no trade takes place.