Cost uncertainty and trade liberalization in international oligopoly

Abstract

Trade liberalization has been shown to be unfavourable for firms of at least one country for the homogeneous goods case in an environment of certainty. We show that, in the presence of private cost information and for ex ante identical firms, oligopolistic firms will prefer to operate under free trade rather than under autarky in homogeneous goods industries provided there exists a certain degree of firms' heterogeneity and a sufficiently large amount of uncertainty. For the particular case of symmetry both in demand and industry sizes, the firms of at least one country prefer to operate under autarky rather than under free trade.