Foreign Trade under imperfect competiton

1. Foreign Trade under imperfect competiton

2. Aim: • From comparative advantage to competitive advantage • comparative advantage: Differnces between nations • competitive advantage: Differences between enterprises

3. Causal factors • Decreasing average costs (cost digression, possibly due to economies of scale ) • imperfect competition with market power • Differentiated products

4. Internally decreasing costs

5. Costs given economies of scale € • Revenue • Costs K/x • Loss p dK/dx x‘ x

6. Cournot Solution pM K/x Marginal Revenue xM Natural monopoly p N dK/dx x

7. K/x N H+F GEH xW Global economies to scale p pH=pW GK NH = GE H+F x xH

8. 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!

9. pW GE xHTfür H xHTin H National decreasing costs p N pH GK DK xH x

10. pW GE xHTfür H xHTin H Welfare effects p N pH GK DK xH x

11. 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

12. 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