CIRJE-F-1089 "Free Trade Agreement with Endogenous Market Structure"
Author Name Pan, Lijun, and Takatoshi Tabuchi
Date June 2018
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We examine the incentives of free trade agreements (FTA) formation between two countries under endogenous market structure with leaders and followers. We demonstrate that establishing an FTA is neither an equilibrium outcome nor social optimum when consumer demand and fi…xed cost are intermediate and products are close substitutes. This is because the FTA induces exit of followers, which makes the market less competitive and shrinks the leader'’s production both in the domestic and foreign markets. We also show that big developing countries are less likely to establish an FTA than small developed countries.