Chapter 6: Scale Economies, Imperfect Competition, and Trade

1. Chapter 6: Scale Economies, Imperfect Competition, and Trade

2. 6.1 Introduction Chapter Objective: To learn and understand the major developments in trade theories after the second World War.

3. Contents • Intra-Industry Trade • Economies of Scale • Product Differentiation • Overlapping Demand • Product Cycle

4. 6.2 Intra-Industry Trade 产业内贸易 • Definition Intra-Industry Trade VS Inter-Industry Trade

5. Measurement Intra-Industry Trade Index ExportsX - ImportsX IITX = 1 - ExportsX + ImportsX 0 < IITX< 1

6. IIT as a Percentage of Trade in Nonfood Manufactured Goods

7. 6.3 Trade with Economies of Scale • Internal Economies of Scale • External Economies of Scale

8. Internal vs. External Economies of Scale Firm’s ACX Firm’s ACX ACX ACX O Firm’s Output of X O Industry Output of X (a) Internal (b) External

9. Internal Economies of Scale • Monopolistic Competition 垄断竞争 Modest Scale Economies • Oligopoly 寡头垄断 Substantial Scale Economies

10. Monopolistic Competition and Trade • Firm’s Production Decision without Trade 封闭条件下厂商的生产决策

11. Figure 6.4 The Monopoly Element in Monopolistic Competition Price and Cost per unit (Millions of yen per car) 3.1 Demand (D0) 1.5 Average Cost Marginal Cost 6 Quantity (Millions of cars per year) MR0

12. Figure 6.5 The Competition Element in Monopolistic Competition Demand (D0)

13. Firm’s Production Decision Under Free Trade 开放贸易条件下厂商的生产决策

14. Figure 6.6 The Same Monopolistic Competitor after Opening Trade

15. Trade and Market Equilibrium 自由贸易条件下的市场均衡

16. Figure 6.7 The Automobile Market with No Trade and with Free Trade

17. Basis for Trade • Product Differentiation 产品差异 • Scale Economies 规模经济

18. Gains from Trade • More Varieties • Lower Prices

19. Welfare effects • Little impact on income distribution between different factor owners. • Gains from greater variety can offset losses in factor income resulting from inter-industry shifts in production.

20. Oligopoly and International Trade • Oligopoly 寡头 Duopoly 双寡头 Large Civil Aircraft Market • Boeing • Airbus

21. Oligopoly and Trade Pattern Production is concentrated in a few countries, which are net exporters, and other countries are importers.

22. What is behind this pattern ? • Comparative Advantage • Economies of Scale

23. Can this pattern be changed ? Not easily. • Scale Economies • New entrants may suffer losses for price reductions and competition from old firms.

24. Oligopoly and Gains from Trade • Oligopoly pricing • National support for high-profit oligopoly firms

25. External Economies of Scale • Industrial Agglomeration • 产业集聚 • Silicon Valley • Hollywood • Wall Street

26. (Short-run) (Long-run) 46

27. Welfare effects • Producers in the exporting country tend to gain producer surplus despite of decline in price. • Producers in the importing country lose producer surplus. • Consumers in both countries gain consumer surplus.

28. Trade pattern Similar to trade with substantial internal economies of scale. • Determination of locations • Size of domestic market • Historical luck • Government push

29. 6.4 Technology-Based Theories of Trade: The Product Cycle Raymond Vernon 1966 雷蒙德·弗农 (1913-1999) Harvard University

30. Product Cycle • New product Mature product • Standardized product • Introduction Growth • Maturity Decline

31. Innovating Country Developed Countries Export t1 t2 t3 t4 t5 t O Import Developing Countries

32. 6.5 Overlapping Demands as a Basis for Trade Staffan B. Linder 1961 林德

33. Product Quality QAmax QAmim O Income IAmim IAmax

34. Product Quality Trade QBmax QAmax QBmim Income Overlap QAmim O Income IAmim IBmim IAmax IBmax

35. SUMMARY • Intra-Industry Trade • Economies of Scale • Product Cycle Hypothesis • Overlapping-Demand Hypothesis