Intra-industry trade with Bertrand and Cournot oligopoly: The role of endogenous horizontal product differentiation

• Intra-industry trade in differentiated products can occur with Bertrand or Cournot oligopoly.
• Cross hauling in homogeneous products will not occur under Bertrand oligopoly.
• If trade occurs Bertrand firms differentiate their products more than Cournot firms.
• Endogenous horizontal product differentiation enhances the gains from trade.
• With low differentiation costs, gains from trade are greater.

This paper investigates the effect of endogenous horizontal product differentiation on trade patterns and the gains from trade under Bertrand and Cournot oligopoly. If trade occurs, Bertrand firms always differentiate their products more that Cournot firms. However, sufficiently high differentiation costs can prevent product differentiation. Trade in homogeneous products never takes place under Bertrand competition. Bertrand firms will either differentiate their products or will not export. Cournot firms, however, may trade in either homogeneous or differentiated products. Product differentiation can significantly increase the gains from trade under both Cournot and Bertrand oligopoly.