Trade liberalization and cartel stability *

Manuscript No: #8529, Acceptance date: November 30, 1999 Trade liberalization and cartel stability* Kjell Erik Lommerud Lars Sørgard RRH: TRADE LIBERALIZATION AND CARTEL STABILITY LRH: Kjell Erik Lommerud and Lars Sørgard Abstract Can reduced trade barriers promote a collusive understanding about not exporting into each others domestic markets? Reduced trade costs increase the short-run gains from starting exporting, but can also make the long-run punishment of such a strategy harsher. If collusion on prices are supported by a trigger strategy, we find that a reduction in trade costs weakens competition in the sense that collusion is easier to sustain. In a corresponding model with collusion on quantities, this conclusion is reversed. We also discuss how results change if grim trigger strategies are replaced by stick-and-carrot punishments. *Lommerud: University of Bergen, Fosswinckelsgate 6, N-5007 Bergen, Norway. E-mail: [email protected]. Sørgard: Norwegian School of Economics and Business Administration, Helleveien 30, N-5045 Bergen, Norway. E-mail: [email protected]. We are indebted to Tore Nilssen and an anonymous referee for helpful comments. We have also benefited from presenting the paper at our home institutions, at an Industrial Organization workshop at Stockholm School of Economics in June 1997, at the EARIE conference in Leuven in September 1997, at Copenhagen Business School in December 1997, at Universidad Complutense in Madrid in February 1998, and at a Nordic workshop in international economics in Stockholm, March 1998.