Consumer-Surplus-Enhancing Collusion and Trade

That collusion among sellers is detrimental to buyers is a central tenet in economics. In the context of trade, we provide an oligopoly model, using only standard ingredients, in which collusion can raise consumer surplus. A differentiated-product duopoly operates in two geographically-separated markets. Each market is home to a single firm, but can import from the foreign firm. Since shipping across markets is costly, every firm has a cost advantage in its home market. Consumers treat the two goods as horizontally-differentiated substitutes and their preferences are identical in both markets. Under duopolistic competition, the markup on the imported variety is low relative to the home good: there are conditions in which a perfect cartel raises the price of the import and lowers the price of the home good, raising welfare for most consumers. A similar consumer-surplus-enhancing possibility result applies to autarky. We also outline settings, other than the spatial one, where our analysis may be relevant.