Trade Policy and Economic Integration in a Cournot Duopoly Model

This paper investigates the policy and welfare implications of forming an economic region in the context of a Cournot duopoly model. Some theoretical results are obtained. First, the economic region lowers the external tariff (against non-partner countries) less than its pre-integration level when a sufficiently large subsidy on the imports from the partner is carried out. Second, economic integration reduces the non-partner country’s welfare. Third, although the region still gains from integration even under some partial trade liberalisation regimes, complete trade liberalisation within the region leads to higher regional welfare. Finally, trade liberalisation within the region improves the welfare of the world as a whole.