Oligopoly

Oligopoly: The Partial Equilibrium Approach

Oligopoly: General Equilibrium and Oligopoly

Oligopoly: The Gains from Trade

Oligopoly is a situation in which several firms competeoveragivenmarket, buttherearesofewfirms that each one can earn a profit over and above what is earned in the more competitive industries. Barriers to entry in the form of information costs, economies of scale, franchises, and patents appear to be sufficient to keep out enough new competitors. Thus it is convenient here to think of oligopoly as imperfect competition without free entry, and monopolistic competitionas imperfectcompetitionwithfree entry.

Not surprisingly, international trade economists concerned with oligopoly have focused on the role of oligopoly profits. Withmonopolistic competition or perfect competition, there are no profitsmeasured as the return over all opportunity costs. The existence of economic profits raises three large questions:How do those profits affect the pattern and volume of international trade? How do those profits affect who gains andwho loses frominternational trade? And do those profits present policymakers with trade policy opportunities?

There are two approaches to studying oligopoly and trade: partial equilibrium and general equilibrium. The partial equilibriumapproach concentrates on the world industry with no attempt to explain the division between exporters and import-competing firms or how oligopoly profits affect demand. This approach is most useful in studying questions involving trade policy. The general equilibrium approach seeks to examine how oligopoly profits affect the traditional trade questions of determiningwhat is traded and the volume of trade, and identifying the winners and losers.

See also comparative advantage; foreign direct investment under oligopoly; gains from trade; Heckscher-Ohlin model; monopolistic competition; New Trade Theory; Ricardian model

FURTHER READING

• Brander, James A. 1981. ‘‘Intra industry Trade in Identical Commodities.’’ Journal of International Economics 11 (1): 1 14. Assumes segmented markets in each country so that oligopoly firms in separate countries sell in each market even if the commodity is homogeneous. 
• Brander, James A., and Paul Krugman. 1983. ‘‘A ‘Re ciprocal Dumping’ Model of International Trade.’’ Journal of International Economics 15 (3 4): 313 21. Price discrimination applied to international trade. 
• Brander, James A., and Barbara J. Spencer. 1985. ‘‘Export Subsidies and International Market Share Rivalry.’’ Journal of International Economics 18 (1 2): 83 100. Shows an export subsidy to a home firm that competes with a foreign firm in a third market is optimal for the case of Cournot competition.
•  Dixit, Avinash K. 1984. ‘‘International Trade Policy for Oligopolistic Industries.’’ Economic Journal 94 (1): 1 16. A survey of partial equilibrium models. 
• Eaton, Jonathan, and GeneM. Grossman. 1986. ‘‘Optimal Trade and Industrial Policyunder Oligopoly.’’Quarterly Journal of Economics 101 (2): 383 406. Shows an export duty on a homefirmthat competes with a foreign firmin a third market is optimal for the case of Bertrand com petition.
•  Krugman, Paul R. 1979. ‘‘IncreasingReturns,Monopolistic Competition, and International Trade.’’ Journal of In ternational Economics 9 (4): 469 79. A simplification of the Dixit Stiglitz model. 
• Lerner, Abba. 1934. ‘‘The Concept of Monopoly and the Measurement ofMonopoly Power.’’ Review of Economic Studies 1 (3): 157 75. Explains the economic ineffi ciency of monopoly in a general equilibrium context. 
• Markusen, James R. 1981. ‘‘Trade and Gains from Trade with Imperfect Competition.’’ Journal of International Economics 11 (4): 531 51. The existence of monopoly can increase the gains from trade under some circum stances. 
• McGahan, Anita M., and Michael E. Porter. 1999. ‘‘The Persistence of Shocks to Profitability.’’ Review of Eco nomics and Statistics 81 (1): 143 53. Shows that industry characteristics determine the persistence of oligopoly profits. 
• Neary, J. P. 2003. ‘‘The Road Less Traveled: Oligopoly and Competition Policy in General Equilibrium.’’ In Eco nomics for an Imperfect World: Essays in Honour of Joseph Stiglitz, edited by R. Arnott, B. Greenwald, R. Kanpur, and B.Nalebuff.Cambridge,MA:MITPress,485 500. Surveys various approaches to oligopoly in general equilibrium and introduces an approach based on Cournot oligopoly with a continuum of firms. 
• Ruffin, Roy J. 1971. ‘‘Cournot Oligopoly and Competitive Behavior.’’ Review of Economic Studies 38 (4): 493 502. Clarifies the relationship between oligopoly, perfect competition, and the number of firms.
•  . 2003a. ‘‘Oligopoly and Trade: What, How, and For Whom?’’ Journal of International Economics 60 (2): 315 35. Shows trade gains under oligopoly can be larger or smaller than under perfect competition in a Ricardo Cournot setting.
•  . 2003b. ‘‘International Trade under Oligopoly Conditions.’’ Review of International Economics 11 (4): 577 87. Gives some simple examples of oligopoly and trade as well as describing the general equations of an oligopolistic world economy. 

ROY J . RUFFIN