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Maximizing Foreign Trade Benefits Under Imperfect Competition

Explore the transition from comparative to competitive advantage in foreign trade under imperfect competition. Investigate differences between nations and enterprises, factors causing cost decreases, and the impact of differentiated products. Analyze welfare effects of trade, considering economies of scale and market power, and evaluate how trade can influence monopolies. Understand the balance between consumer surplus and producer profits in global trade scenarios.

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Maximizing Foreign Trade Benefits Under Imperfect Competition

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  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

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