Intra-industry trade and strategic interaction: Theory and evidence

We conduct a theory-based empirical study of intraindustry trade in homogeneous products. We derive an oligopolistic model of intra-industry trade, which is an extension of the segmented market model of trade, initially proposed by [Brander, J. A., 1981, Intra-industry trade in identical commodities, Journal of International Economics 11, 1-14]. The empirical implementations of the model are investigated in the context of the petrochemical industry. Our analysis employs a unique data set containing detailed product and location-specific data on the petrochemical industries in Germany and the United States. Allowing for different empirical specifications, we find that cross-product variations in bilateral intra-industry trade of petrochemicals are well explained by the variables suggested by the theoretical model. (C) 1998 Elsevier Science B.V.