MIXED STRATEGY TRADE EQUILIBRIA

Two major paradigms prevail in trade theory: perfect competition and monopolistic competition. In the former case only prices are important, whereas in the latter case product characteristics are important. In both instances pure-strategy equilibria exist. This paper considers the hybrid situation where some customers care only about the price while others have a brand preference or care about product characteristics. It is shown that an equilibrium in pure strategies does not exist, but that a mixed-strategy equilibrium does exist. This in turn implies endogenous uncertainty in the pattern, terms, and the gains from trade.