International trade, bargaining and efficiency: The holdup problem

In the presence of product market imperfections and holdup, we identify all ocative and productive efficiency gains resulting from international trade. Under a bilateral monopoly in a closed economy, inefficiencies arise in bo th input and output markets. Trade in final goods has a procompetitive effe ct in the product market. This in turn triggers an increase in output, whic h raises incentives for the upstream firm to invest and helps reduce the ho ld-up problem.