An Empirical Assessment of the Welfare Effects of Reciprocal Dumping

Can two-way trade in similar products lead to lower welfare than if such trade was banned? Theory answers yes. To empirically investigate this proposition we examine Swedish imports of bottled water. Assuming one-shot (Bertrand and Coumot) competition, we can use the estimates from a structural model of demand to uncover marginal costs. We simulate the effect on consumer and producer surplus of banning imports. We do not find convincing evidence that banning imports would increase overall welfare. 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.