Asymmetric cartel formation under trade liberalization: Heterogeneous firms with capacity constraints

In a context of trade liberalization , this paper is interested in studying the impact of a decline in trade costs on cartel formation between foreign and domestic firms. In a model that endogenizes the cartel formation be- tween heterogeneous firms in their capacities and their marginal costs, the paper investigates how the decrease in trade tariffs affects the formation of such a cartel. Contrary to previous works in this area, the paper does not study how trade liberalization affects cartel stability, however it is in- terested in testing whether the cartel becomes more or less inclusive after this openness. The model predicts that the price prevailing on the mar- ket following trade liberalization depends on capacity distribution of the foreign firms. If they are large enough, price may increase after openness.