VI Introduction to Trade under Imperfect Competition

Transcription

1 VI Introduction to Trade under Imerfect Cometition n In the 1970 s "new trade theory" is introduced to comlement HOS and Ricardo. n Imerfect cometition models cature strategic interaction and roduct differentiation: n two-way trade in an industry between similar countries can be exlained n trade can increase cometition and/or roduct variety and cause economies of scale 1

2 GLs= [(s+ms) s Ms ]100/(s+Ms) A high value of the Grubel-Lloyd Index indicates a large share of intra-industry trade. Source: Brülhart (2008).

3 Most of world trade occurs between develoed (North) countries. Source: UN COMTRADE. 3

4 Trade theory models under imerfect cometition monoolistic cometition models strategic interaction (oligooly) models Identical endowments and technologies to abstract from HOS/Ricardo trade motives. Country size, number of firms become imortant variables. 4

5 Partial equilibrium analysis of monooly ricing n Total surlus equals consumer surlus lus rofits SC+П. n Marginal cost ricing: $ Π = q q 0 C' u ( ) du c SC П q c Cm(q) (q d ) q Rm(q)=+ (q)q

6 n Monooly ricing: n Profit maximization satisfies R (q m )=C (q m ) q m, m $ n Deadweight loss D m SC П D Cm(q) (q d ) q m q Rm(q)=+ (q)q

7 In artial equilibrium, the consumer enjoys lower utility under monooly ricing because of the deadweight loss. But the marginal cost may not be the same under closed and oen economy this figures does not encomass all effects when moving from autarky to trade under general equilibrium need for a two good model 7

8 1. Pro-Cometitive Gains From Trade 2 good model constant returns to scale identical countries in all resects focus on the role of imerfect cometition 8

9 1.1 Autarky Perfect cometition in sector Y, imerfect cometition in sector Imerfect cometition in sector small number of roducers that take into account the demand elasticity when setting their rice rice is above marginal cost Y > c = Y erfect cometitio total roduction of is lower than under erfect cometition n 9

10 Budget constraint where П are aggregate rofits, if any d + YY = w L + w Y LY d Since good Y roduction is erfectly cometitive, all factor units not used by are used to roduce Y. roduction is still on the PPF d + Y = + Y d s Y Y + Π s 10

11 Autarky under Perfect Cometition in sector Y and Perfect/ Imerfect Cometition in sector Y A c A a c 11

12 1.1.2 Imerfect cometition in both sectors The rice is above marginal cost in both sectors Not ossible to rank a riori the relative rice comared to the erfect cometition rice Y ><? c again, higher welfare under erfect cometition: inefficiency in both sectors in this case 12

13 1.2 Trade Liberalization When World Markets Are Perfectly Cometitive Assumtion: domestic roducers of lose all market ower in the oen economy Identical Countries The world market rice is a erfect cometition rice under autarky in any country: higher welfare under free trade than under autarky: the deadweight losses disaear thanks to the marginal cost ricing "ro-cometitive" effect of trade 13

14 Proosition When markets imerfectly cometitive under autarky are oen to free trade making them erfectly cometitive, welfare increases in both countries thanks to rocometitive effects Note: since countries are identical, no trade takes lace in equilibrium no secialization and exchange gains the ro-cometitive effect is a new effect 14

15 1.2.2 Different Countries The autarkic rices are a riori different in both countries and, under free trade, the world rice is between the autarkic rices The "standard" secialization and exchange gains add to the ro-cometitive gains: see next figure 15

16 n A A c : ro-cometitive gains from trade n A c Q f, C f : standard gains under erfect cometition Y A Q f A c a C f c * 16

17 1.3 Trade Liberalization When World Markets Are Imerfectly Cometitive Identical Countries Assumtion: cometition is still imerfect on the world market, but stronger than on each local market The world market rice is below the autarkic rice under imerfect cometition, but above the erfect cometition rice roduction and consumtion increase no trade since identical countries not ossible to comare the relative world rice to the rice under autarky, but welfare gains thanks to the reduction of the deadweight loss: ro-cometitive gains 17

18 Y A f Q =C f a * 18

19 1.3.2 Different Countries Imerfect cometition in sector, erfect in sector Y Proosition: The less roductive, or the larger demand, or the smaller firm number country imorts the good roduced in the imerfectly cometitive sector and gains less from free trade, may even lose Intuition: On country loses income (sales + rofit) in the imerfect cometition sector, the other country gains. That effect is added to the ro-cometitive effect and other gains from trade ambiguous total imact on welfare 19

20 Y Q f A welfare gain C f a * 20

21 Y welfare loss Q f A C f a * 21

22 Welfare gain if strong secialization / exchange and ro-cometitive gains small good roduction contraction and income losses (or income gains) Welfare loss if strong income losses comared to secialization / exchange and ro-cometitive gains Welfare always increases if the erfect cometition situation is reached Other remarks to make more recise redictions we need a model of imerfect cometition firms in the less efficient sector lose, but consumers gain: redistributive effects if consumers are not all firm owners trade takes lace when countries are different 22

23 2. Increasing Returns to Scale Increasing returns to scale are in most cases incomatible with erfect cometition Additional channel for gains from trade trade secialization larger roduction scale lower average roduction cost: efficiency gains Assumtion: increasing returns are strong enough to make the PPF monotonically convex includes constant variable cost and fixed cost, or decreasing variable cost excludes fixed cost and decreasing marginal returns as in HOS 23

24 2.1 External Economies of Scale Assumtion: CRS at the firm level, but roductivity increases with the total size of the economy firms do not internalize the national externality standard assumtion in the AK endogenous growth models Examles infrastructure: national research organizations, education system, transort network labor market ooling for highly-skilled workers, secialized suliers knowledge sillovers Imlication: erfect cometition with a convex PPF 24

25 Assume identical references and technology. Autarky is reresented by oint A. Y Y A 25

26 Desite identical technology and references, there are gains from trade. Otimal situation at the world level: each country roduces only one good (full secialization) and freely exorts / imorts minimizes the average roduction cost Proosition If there are some increasing returns to scale, if trade induces some secialization in roduction comared to autarky and the degree of cometition increases, the world as a whole (sum of both countries) gains from free trade the IRS effect is referred to as "roductive efficiency gains" 26

27 But the gains from trade are different between countries due to rice effects ( "roduction shifting" effects) Examle of the case with two identical countries such that free trade imlies full secialization of each country in a given good: see next figure 27

28 Figure: Trade Liberalization Effects if Full Secialization Y Y f Q 1 * One country gains less and may even lose. f C 2 f C 1 * f = f Q 2 Y 28

29 In general the relative rice that clears world markets is different from If the relative rice is greater than f : f = the country that secializes in good gains more than the other country country 2 gains more because it secializes in the good whose rice is "high (highly demanded relative to roduction ossibilities) country 1 may even lose from trade trade causes secialization and factor rice unequalization Y Proosition (i) A country may lose from trade liberalization if it secializes in a good whose rice is low (ii) Both countries gain from trade liberalization if the world rice is close to f 29

30 2.2 Internal Economies of Scale Examle: firm-level fixed costs (R&D sector, marketing, headquarters ) Technical definition of internal increasing returns to scale: marginal cost lower than the average cost C ' ( q ) < C q ( ) q C ( q ) q is a decreasing function 30

31 Imlication: marginal cost ricing cannot be an equilibrium because it imlies negative rofits π q = q C q ( ) ( ) = C q q ( ) q C q q ( ) C ' ( q ) <, = C' ( q ) π( q ) < 0 31

32 Direct and Indirect Pro-cometitive Effects of Trade Liberalization Same direct ro-cometitive effect as in 1.3 increased cometition lower firm mark-u lower deadweight losses imerfect cometition is justified here by the resence of increasing returns to scale that limit firm entry Indirect ro-cometitive effect: scale economies new effect: lower rices higher scale lower cost er unit same kind of effect as in the case of external economies of scale but induced here by the direct ro-cometitive effect 32

33 Examle 1 (short-run): fixed number of firms n assumtions: ü identical countries: no trade in equilibrium ü exogenous number of firms (short-run situation) such that rofits are ositive under both autarky and free trade ü free trade does not affect the number of firms technology ü Y = L Y l = ax + F ü is the labor needed for a given firm in sector in order to roduce x units of good F : fixed cost in terms of labor units, a : unit labor requirement 33

34 aggregate roduction function in sector : = nx = L where n is the firm number, and L x is total emloyment in sector : L = n. l roduction frontier full-emloyment constraint Y + a + nf = unique inut wage normalized to 1 cometition ü erfect in sector Y ü imerfect in sector grahic reresentation : see next figure a L nf 34

35 n A B: direct ro-cometitive gains n B Qf =Cf : efficiency gains due to the decrease in average cost (indirect ro-cometitive gains) Y Y = L L nf Average cost in sector : wl = Y L L Y = Y L Y A Q f = C f B * * = L nf a 35

36 Examle 2 (long-run): exogenous firm exit assumtions ü exogenous initial number of firms ü free trade reduces the local number of firms, but cometition increases at the world level a * * n * i < n i < n 1 + n 2 ü identical countries 36

37 Figure: Internal Economies of Scale and Trade Liberalization, Changes in Firm Numbers 37 Y = L Y F n L a i a F n L a i = A f f C Q = * a F n L * i = F n L * i

38 to the direct and indirect ro-cometitive gains, add now efficiency gains due to the decrease in the number of firms Note: no endogenous reasons for firm exit in the short-run case multile equilibria on the identity of the exiting firms if not identical countries, the smaller demand / larger firm number / more roductive country gains more than the other one: see and next chater 38

39 Examle 3 (long-run): examle 2 + endogenous exit assumtions: ü free entry assumtion: firms enter and exit until rofits are zero rice = average cost ü free trade increases cometition at the world level and thus reduces the number of firms in each country ü identical countries with the same number of firms in equilibrium under both autarky and free trade 39

40 Figure: Internal Economies of Scale and Trade Liberalization, Endogenous Changes in the Number of Firms L L Y Y = L n n LT * i LTa i F F A Average cost in sector at free entry: Q f = C f wl = Y L L Y = Y L Y = = C ( q q ) * = L n a LTa i F = L n i a LT * F 40

41 Production at A and Q=C is higher than on the revious Figure, since the number of firms is lower Note: same ro-cometitive and efficiency gains than in the revious case, but endogenous firm exit, and more otimal situation thanks to the zero rofit condition unequal country gains if country have different roductivity or size ü the smaller / more roductive country gains more: see next chater indeterminacy of exiting firms in equilibrium first-best = unique firm ricing at marginal cost ü because of negative rofits, the central lanner has to subsidize the unique firm (otimal if lum-sum transfers are ossible) ü the country where the firm is localized gains more: transfers across countries are necessary 41

42 3. Gains from Increased Variety When consumers value the diversity of goods in their utility function: free trade imlies a higher number of firms, which may imly a higher number of varieties available new gains from free trade See the monoolistic cometition model... 42

43 4. Conclusions These new gains from trade aly to firms if the goods are used as inuts. inut users benefit from ro-cometitive effects (direct and indirect), global efficiency gains, gains from firm exit, love for diversity gains due to free trade some of these gains are assed onto consumers in the form of lower rices 43

44 Some indeterminacy may exist under the oen economy equilibrium as regards which country roduces what, and thus which country gains more from free trade roblem of equilibrium selection "history matters"? Perfect and imerfect cometition models are comlementary exlanations to trade and to the effects of trade liberalization References Markusen, J., J. Melvin, W. Kaemfer, and K. Maskus, International Trade - Theory and Evidence, Mc Graw-Hill. Chaters 11 and