Perfect competition and intra-industry trade

The paper presents a formal analysis which incorporates risk aversion to international trade. It is shown that risk-averse firms operating in perfectly competitive markets with uncertainty of demand tend to diversify markets which gives a basis for international trade in identical commodities between identical countries. If market demand is elastic enough such trade is welfare improving despite efficiency losses due to cross-hauling and transportation costs. (C) 2002 Elsevier Science B.V. All rights reserved.