D. Neven, G. Norman, Jacques-François Thisse
Canadian Journal of Economics
In this paper we analyze price competition between firms established in different countries when demand is sensitive to national biases. The intensity of this bias varies across consumers. In this context, trade arises because of the dispersion of consumers' perception of the foreign good; when consumer attitudes are diverse enough, one firm concentrates on consumers with an intensive bias, leaving room for the other, which will serve consumers with a low bias. Next, an increase in import tariff will unambiguously lead to a general increase in price, since, in equilibrium, the domestic firm will decide to increase margins. Finally, we identify conditions under which "Buy Domestic" campaigns increase local welfare and output.