Sustaining Collusion under Economic Integration

In this paper, we aim at investigating from a game theory perspective whether trade liberalization can promote a collusive intra-industry trade and whether such a collu-sive trade is always socially desirable compared to the autarchy solution. We show that, under Cournot competition, economic integration is anti-competitive if collu-sive trade is a possible outcome of the repeated game; under price competition, the likelihood of collusive trade is a necessary but not sufficient condition for trade lib-eralization to be pro-competitive. Furthermore, we show that economic integration may increase the scope for collusion no matter firms ‘ strategic variable. Finally, from a policy perspective, we prove that open up to trade is always socially desirable compared to autarchy even if collusive trade arises. JEL Classification: F12, F15, L13. Key Words: cartel stability, trade liberalization, trade costs, multimarket contact, oligopoly