Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/226256 
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8554
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
Abstract: 
We consider an international cartel whose members interact repeatedly in their own as well as in third-country segmented markets. Cartel discipline-an inverse measure of the degree of competition between firms-is endogenously determined by the cartel's incentive compatibility constraint (ICC), which links strategically markets that are seemingly unrelated. Owing to this linkage, trade cost reductions induce cartel members to adjust their sales, not only due to direct effects, but also due to spillover effects related to cartel discipline. We apply these ideas to preferential trade agreements (PTAs) and show that the indirect effects can give rise to trade diversion. We also characterize the welfare effects of preferential tariff cuts for all countries under various circumstances regarding the determination of external PTA trade policy. A persistent finding is that, in the absence of appropriate regulation, preferential trade liberalization can be welfare-reducing even when external policy is jointly optimal.
Subjects: 
multimarket contact
repeated interactions
constrained collusion
intra-industry trade
welfare
optimal trade policies
JEL: 
D43
F10
F12
F13
F15
L12
L13
Document Type: 
Working Paper
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