Social-Welfare-Enhancing Collusion and Trade

Deltas, Salvo and Vasconcelos (2012) develop a model of geographically separated markets with differentiated goods in which collusion (or merger to monopoly), by restricting trade relative to duopolistic competition, is beneficial for society and can be beneficial for consumers. In this chapter, we provide additional results as well as an extension of that model. We show that a social planner would further restrict trade than the perfect cartel would, and how the socially optimal market allocation can be induced through a system of taxes and subsidies, or through "anti-dumping" regulation. We generalize the model to allow for home biased consumer tastes and show that our original analysis is robust. We also consider whether autarky can improve social welfare over market-based trade regimes, in the spirit of Brander and Krugman (1983).