Two-Country Trade Liberalization in an Address Model of Product Differentiation.

This paper investigates the effects of reciprocal tariff reductions in a two-identical country model of product differentiation. It makes three points. First, the existing results about market structure effects of trade liberalization can easily be replicated from a one-dimensional characteristic space model in which the prohibitive tariff rate is endogenously determined. Secondly, these effects depend crucially on the initial ad valorem tariff rate. Thirdly, reciprocal tariff reductions alone do not necessarily warrant welfare gains.