Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 599: Bottled Water - A Case of Pointless Trade?

Richard Friberg () and Mattias Ganslandt ()
Additional contact information
Richard Friberg: Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
Mattias Ganslandt: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: Two-way trade in (almost) homogenous products has ambiguous welfare effects if entry is restricted. We examine Swedish imports of bottled water to investigate whether transport cost losses from trade outweigh the partial equilibrium gains from trade (stronger competition and more brands to choose from). Using monthly data for all brands sold in stores during 1998-2001 we estimate a structural model of demand. Assuming one-shot Bertrand competition by multibrand firms, we can use the estimated model to uncover marginal costs. We stimulate the effect on consumer and producer surplus of banning imports, finding the banning imports would decrease overall welfare. Expanded choice is the main benefit of trade and disregarding his the net welfare effect of imports in this market are approximately zero - the pro-competitive effect is of the same size as the cost savings associated with replacing foreign, higher cost, suppliers with domestic. Given our choice of market this suggests we should not be overly concerned with the welfare effects of two-way trade in consumer goods that are close to homogenous.

Keywords: Reciprocal dumping; Intra-Industry Trade; Nested Logit Models

JEL-codes: F12; F14; L13; L66

31 pages, June 24, 2003

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