THE SIZE OF TRADING BLOCS - MARKET POWER AND WORLD WELFARE EFFECTS

We construct an n-country n-commodity trade model to analyze the impli cations of bloc size for (Nash) equilibrium tariffs and welfare. The r elationship between the absolute size of (symmetric) trading blocs and their market power is ambiguous, and we illustrate how this relations hip varies with model parameters. In contrast, sufficiently large incr eases in the relative size of a bloc enhance its relative market power and cause the welfare of its country members to rise above the free t rade level. We establish the existence of an optimal bloc size, and st udy the dependence of optimal size on the parameters of the model.