JOWlldOl INWNNAWlNAL ECONOMICS EISEVIER Journal of International Economics 40 (1996) 41 l-437 The size of trading blocs Market power and world welfare effects Eric W. Bond*, Constantinos Syropoulos Department of Economics, Pennsylvania State University, University Park, PA 16802, USA Received 1 June 1993; revised 1 September 1995 Abstract We construct an n-country n-commodity trade model to analyze the implications of bloc size for (Nash) equilibrium tariffs and welfare. The relationship between the absolute size of (symmetric) trading blocs and their market power is ambiguous, and we illustrate how this relationship varies with model parameters. In contrast, sufficiently large increases 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 trade level. We establish the existence of an optimal bloc size, and study the dependence of optimal size on the parameters of the model. Key words: Regionalism; Trading blocs; Strategic interactions; Market power: Welfare JEL classijcation: F02; F13; F15 1. Introduction Much of the recent concern over the effects of the increase in the number of regional trading arrangements on the multilateral trading system has centered on the question of how the expansion of trading blocs will affect their external tariffs, and thus the level of world welfare.’ One view, expressed in the concern over the *Corresponding author: Tel. (814) 863-0315; Fax. (814) 863-4775; Email: ewbl @psuvm.psu.edu. ‘Most of the existing work on preferential trading arrangements focuses on the effects of formation of customs unions, holding external tariffs constant. Since the work of Viner (1950) it has been known that a preferential reduction in tariffs generates ambiguous welfare effects, due to the second-best nature of the problem. Corden (1984) provides an excellent survey of the literature. 0022-1996/96/$15.00 0 1996 Elsevier Science B.V. All rights reserved SSDI 0022-1996(95)01412-8