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Published: 21-12-2012, 17:57

Oligopoly: The Gains from Trade


Oligopoly: The Partial Equilibrium Approach

Oligopoly: General Equilibrium and Oligopoly

We assumed in table 1 that there are equal degrees of oligopoly in both sectors of the economy. This implies that the gains from trade in the economy cannot exceed what would prevail under perfect competition, although workers can clearly gain more because of the procompetitive effects of trade on both export and import prices. But some authors have argued that with oligopoly the trade gains to the economy are greater than under perfect competition! As discussed in Ruffin (2003a, 2003b), thismay arisewhen there are different degrees of competition between sectors. Markusen (1981) considers a two-sectormodel with perfect competition in one sector and monopoly in the other, and assumes that when international trade opens there is a two-firm Cournot oligopoly of Home and Foreignmonopolists. Heshows that even in the absence of actual trade, the potential for trade can improve welfare due to the procompetitive effects of the resulting two-firm world oligopoly. Markusen proves the result by making the strong assumption that under perfect competition there are no comparative advantages and, hence, no gains from trade. The existence of monopoly or oligopoly in part of the economy then improves the gains from trade because opening markets reduces those oligopoly powers.But there is no general rule thatunder oligopoly or monopoly the gains from trade are greater than under perfect competition, as pointed out by Ruffin (2003a). In fact, Ruffin (2003b) gives an example in which the country exporting the good produced by an oligopoly gainsmore fromtrade than under perfect competition, but the country importing that good gains less.The reason has to dowith the unfavorable terms of trade effects related to exporting goods produced under competition compared with oligopoly.

Oligopoly also has important implications for the effect of trade on income distribution. Standard Heckscher-Ohlin trade theory predicts that abundant factors of production gain from trade while scarce factors lose from trade. The reason for this is that trade shifts resources fromindustries intensive in scarce factors to industries intensive in abundant factors. The imbalance of supply and demand requires the prices of abundant factors to rise, and those of scarce factors to fall. Thus a key characteristic of Heckscher-Ohlin theory is that the opening of international trade, or the expansion of trade from lower trade barriers, should cause a factor of production to lose in one country and gain in another country. The existence of oligopoly moderates this effect, and it is possible for oligopoly profits to rise everywhere or fall everywhere. In the case of loose oligopolies, trade can cause profits to soar because low-cost firms drive out high-cost firms and their gain in profits from the world market will offset the loss of profits from the high-cost firms. This can happen everywhere. With tight oligopolies, low-cost firms must compete with high-cost firms and their profits will fall everywhere.

The case of workers is quite different. It is possible to show that, abstracting from Stolper-Samuelson effects arising from different factor intensities, workers must always gain from international trade. This holds under quite general circumstances, regardless of differences in the degree of competition across the economy.The reason is that under all circumstances, prices must fall measured in terms of wage units. Examining equation (3) shows this. Unless the price elasticity of demand falls (an unlikely event in a larger market), an increase in the number of firms (both low- and high-cost)will cause the price of the product to fall for both export goods and import-competing goods. If there is the same number of firms, but the high-costfirmsdisappear comparedwith autarky, the prices of imported goods fall while the prices of exported goods remain the same: workers still gain. This, of course, ignores the adjustment costs that workers will suffer moving from high-cost to lowcost industries, as would be the case for perfect competition as well. So oligopoly raises no newissues here except for the possibility of long-term contracts that may be present in concentrated industries that may not be present in more competitive industries. The mobility of workers under oligopoly is an issue that can and should be studied.

The importance of oligopoly in international trade focuses on the role of profits. Trade policy that shifts profit from one country to the other faces informational problems and the possibility of retaliation. Generally speaking, oligopoly makes it more likely that trade will benefit nonprofit factors such as workers. Oligopoly can make trade gains to the economy smaller if oligopoly is widespread, but only if oligopoly is concentrated in the export sectors can trade be more beneficial to the economy.

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