Welfare implications of free trade agreements under Bertrand and Cournot competition with product differentiation

This study examines the effects of free trade agreements (FTAs) on the welfare of both member and nonmember countries and the incentives for multilateral free trade in a three-country model of Bertrand and Cournot competition in differentiated oligopolies. First, we demonstrate that an FTA increases the welfare of all member and nonmember countries in both Bertrand and Cournot competition with product differentiation. Second, we show that if products are nearly perfect substitutes, an FTA may hamper the incentive of a nonmember country to support multilateral trade liberalization with Bertrand competition, which sharply contrasts with the case of Cournot competition.