Economics Course in International Trade: Imperfect Competition

Imperfect Competition

Trade theories based on imperfect competition

We can categorise the economies of scale as those

at the firm level
at the industry level
at the economy level
over time.

Here, we will discuss two significant models, Kemp's model (EOS at the industry level) and Krugman's model (EOS at the firm level).

Kemp's Model

A two-good world where both industries experience EOS.
PPF is convex to the origin.

If the opening of the country to trade leads to a TOT line steeper than TOT₁, the country will completely specialise in X by producing at N.

If the TOT line is flatter than TOT₂, the country will completely specialise in X by producing at N.

If the TOT line falls in between TOT₁ and TOT₂, it is unclear where this country produces. However, even in this case, a complete specialisation will give a higher utility by trade.

Krugman's Model: based on "monopolistic competition"

c: per capita consumption

pp: the relationship between the price of the good and marginal cost. (As consumption increases, demand becomes less elastic.)

with constant marginal cost, P for profit maximisation. Therefore, pp is upward sloping.)

zz: zero economic profit in the long run.

`pi = 0' means Tk = TC or Tk - TC = 0.

pQ - (a + bQ)W = 0
where (a + bQ) is the labour requirement for producing Q.

p/W = (a + bQ)/Q
p/W = b + a/Q where Q = c.L (total output = per capita consumption x total labour)

By trade, market sizes increase for each firm. As the market size increases, cost decreases by EOS.

As the increase of the market size means L , zz curve will shift down to zz'.

Results

(p/W) decreases, which means (W/p) increases: consumers' welfare increases.
c decreases, but consumers consume more varieties by trade.

Factor Growth and Trade

Intra-Industry Trade

Basic Models

Web site created by
First Step Communications