Foreign Trade under imperfect competiton

Aim:

From comparative advantage to competitive advantage

comparative advantage: Differnces between nations

competitive advantage: Differences between enterprises

Causal factors

Decreasing average costs (cost digression, possibly due to economies of scale )

imperfect competition with market power

Differentiated products

Internally decreasing costs

Costs given economies of scale

dK/dx

€

x

Revenue

Costs

K/xp

x‘

Loss

Natural monopoly

dK/dx

pN

x

Marginal Revenue

K/x

pM

xM

Cournot Solution

Global economies to scale

pH=pW

GK

p

NH = GE H+FGEH

K/x

xH x

N H+F

xW

Welfare effects of trade

If there are no price effects and global economies to scale, then

Trade is welfare increasing due to lower costs Only producers benefit through higher profits It becomes important where production is located (

If there is a national bias in ownership or workers participate in „profits“ through higher wages.)

The non-producing countries loose Countries which are bigger have an advantage

Bigger is better!

National decreasing costs

GK

pN

x

GE

DK

pH

xH xHTin HxHT

für H

pW

Welfare effects

GK

pN

x

GE

DK

pH

xH xHTin HxHT

für H

pW

Welfare effects

If trade changes the monopoly into perfect competition, then

There is a benefit from trade Through a reduced price for consumers Consumers gain by an increades consumer

surplus Producers loose

Generally

In real life both effects tend to be present Competition effect: Consumers benefit

from increased competition in the form of decreased prices

Cost reduction effect: producers benefit because of reduced production costs