A decomposition of gains from trade in a differentiated oligopoly

Constructing a two-country oligopolistic model with product differentiation, this paper revisits welfare effects of free trade. The hybrid of procompetitive and variety expansion effects means that trade liberalization has definite benefits for the consumer, while it is contingent whether it is beneficial to oligopolistic firms and national welfare. We illustrate how these two effects interactively affect the possibility of gains from trade with simple diagrams.