This paper builds a general oligopolistic equilibrium model based on Neary (2009. “International Trade in General Oligopolistic Equilibrium,” University of Oxford and CEPR, Working Paper) to investigate the relationship between trade liberalization and competition levels. In a closed economy, a decrease in competition negatively affects a country’s welfare and reallocates factors from low marginal cost sectors to high marginal cost sectors. However, in an open economy with trade liberalization, the properties of factor reallocation
give a country the incentive to adopt a beggar-thy-neighbor policy, which decreases its competition level and maximizes its own welfare under certain conditions. Hence, international coordination of competition policies could possibly increase both world welfare and trade.
Keywords: General Oligopolistic Equilibrium (GOLE), Trade Liberalization, Competition Policy