Endogenous Market Structure, Trade Cost Reduction, and Welfare

We show the long-run effects of a trade cost reduction in an oligopolistic industry. If the labor markets are competitive and the products are homogeneous, a lower transportation cost affects neither consumer surplus nor welfare of the importing country under free entry of domestic firms. If the products are imperfect substitutes, a lower transportation cost may reduce consumer surplus and welfare of the importing country. We also show the implications of a domestic labor union, free entry of domestic and foreign firms, integer constraint, and a tariff as the trade cost.