Intra-industry Trade and Investment under Oligopoly: The Role of Market Size
This paper examines the factors which influence intra-industry trade under oligopoly. It argues that major determinants are the size of markets and the height of trade barriers. If national markets are large and trade barriers high, intra-industry trade is replaced by cross-investment between countries, whereby firms serve the markets of their foreign rivals by investing abroad instead of exporting. This result is established formally using a simple two country, two firm game-theoretic model. The same model is also used to examine how barriers to trade influence prices and output. The paper concludes with a brief discussion of how economic growth affects the volume of intra-industry trade. Copyright 1992 by Royal Economic Society.