Comparative Advantage and Intra-Industry Trade: A Cournot-Ricardo Approach

This paper attempts to provide an alternative conceptual framework for understanding the prevalence of trade and intra-industry trade among similar countries. This paper builds on the idea of Brander(1980) that international Cournot competition in segmented markets can generate intra-industry trade. I merge his partial equilibrium model with the Ricardian trade model of Dornbusch, Fischer and Samuelson(1977), and show that this Cournot-Ricardo model can generate the patterns of trade consistent with empirical findings. The volume of trade increases as trading partners become more similar in terms of income. The intensity of intra-industry trade increases with similarity of trading partners, where similarity is measured either in terms of income or in the distribution of productivity across industries.