Abstract
We use a three country – one good Cournot oligopoly model to investigate feasibility of free trade areas (FTAs) between two of the three countries. Using a linear demand, constant marginal cost and a welfare function which is a sum of consumers’ surplus (CS), profits and tariff revenues (TR), we derive optimum tariff before and after an FTA is formed. We show that although tariffs imposed by FTA members are lower than pre FTA tariffs, the optimum tariff imposed by the non-member remains unchanged. We also show that an FTA will be supported by member countries if gain in CS at home and gain in market shares in partners’ market exceed loss in market share at home and loss of tariff revenues. Furthermore, we show that although non-member’s CS and TR do not change under FTA, its market shares in FTA members’ markets increase. Hence its welfare also increases. Finally, we derive a sufficient condition under which a multilateral FTA between all three countries will be feasible.
Recommended Citation
DasGupta, Manabendra and Lee, Seung Dong
(2011)
"Regionalism, Trade Liberalization and Imperfect Markets,"
Journal of Business, Industry, and Economics: Vol. 16, Article 6.
Available at:
https://roar.una.edu/jobie/vol16/iss1/6