ABSTRACT This paper develops a bilateral symmetric trade model with firms engaging in strategic exporting behaviour. It provides a unified analysis of trade liberalisation allowing for a rich set of cost structures both on the production side and the transportation side that go beyond the standard assumption of constant marginal cost. The theoretical analysis reveals among others that trade liberalisation does not always result in welfare gains. In fact, trade liberalisation coinciding with a reduction in the transport cost can significantly reduce consumer welfare. Depending on the transport cost and the fixed cost of exporting, almost all possible trade patterns can appear. Trade liberalisation may even prevent a country from participating in exports when fixed costs are relatively high. We thus provide a potential theoretical rationale for the many existing empirical studies that report results that diverge from standard theories, by bringing it back to the diverse cost structures that may occur in the real world beyond the ones assumed in the existing theories.
Takauchi et al. (Mon,) studied this question.