Intra-Industry Trade with Substitutes and Complements under Bertrand Duopoly

Intra-Industry Trade with Substitutes and Complements under Bertrand Duopoly

This paper analyzes Bertrand equilibria when goods are substitutes and complements under multilateral free trade. We first show that if transport cost is sufficiently large, the home firm and the foreign firm, respectively, supply more in the domestic market when goods are substitutes than when goods are complements. However, if the home firm and the foreign firm, respectively, have an incentive to export, they export more when goods are complements than when goods are substitutes. We also present and analyze the conditions that the consumer surpluses, the producer surpluses, and the welfare of the home country and the foreign country, respectively, are greater when goods are substitutes than when goods are complements.