Strategic Trade Policy in Asymmetric Markets: The Role of Product Differentiation and Free Trade Agreements

This study examines the dynamics of Bertrand competition for differentiated products among three asymmetric countries, focusing on the welfare implications of free trade agreements (FTAs). It explores how product substitutability, market size differences and competitive strategies influence post-FTA welfare outcomes. The findings reveal that the welfare gains from FTAs are higher when market size differences are greater for homogeneous products than for differentiated products. This suggests that FTAs have a stronger effect on welfare in markets with differentiated products compared to homogeneous products. The study provides valuable insights into the strategic design of FTAs, emphasising the importance of considering market structure and product characteristics when negotiating trade agreements. JEL Codes: F12, F10, C10