国际贸易双语教案Chap024 (7)

Chapter 6

Scale Economies, Imperfect Competition, and Trade

Overview

For the 14th edition, this chapter has a new name, and much of it has been rewritten to be clearer and more accessible to students.

Standard trade theory presented in chapters 3-5 is based on perfect competition, with constant returns to scale at the level of the individual firm and constant or increasing cost of expanding production at the level of the industry. Comparative advantage predicts that countries will trade with other countries that are different (the source of the comparative cost differences) and that each country will export some products and import other, quite different products. While much international trade conforms to these patterns, a substantial amount does not. Most obviously, industrialized countries trade a lot with each other, and in much of their trade each is exporting and importing similar products.

This chapter looks at three theories of trade based on market structures that differ from the standard theory. Each of these theories includes a role for scale economies, so that unit costs tend to decline as output increases. The first section of the chapter defines and examines scale economies, including a new Figure 6.1 that shows the average cost function with scale economies, as well as an explanation of the difference between scale economies that are internal to the individual firm, and scale economies that are external to the firm but apply to a cluster of firms in a geographic area.

The next section of the chapter defines intraindustry trade (IIT), in which a country both exports and imports the same product or very similar product varieties. It explains how IIT is measured for an individual product, with examples shown in a new Figure 6.2. The importance of IIT in a country’s overall trade is the weighted average of the IIT shares for each of the individual products. The new Figure 6.3 provides original information on the overall importance of IIT.

The remainder of the chapter presents the three additional trade theories. The first is based on monopolistic competition. While there may be a number of explanations of intra-industry trade, product differentiation seems to be the major one. The market structure of monopolistic competition is useful for analyzing the role of product differentiation. Each producer faces a downward-sloping demand curve for its product variety. If scale economies (internal to the firm) are moderate (relative to the size of the total market for all varieties of this product), then free entry drives each firm to earn a normal profit (the average cost curve is tangent to the demand curve). If a monopolistically competitive market is opened to international trade, then a domestic consumer has access to additional varieties of the product—those that can be imported. A domestic producer has access to additional buyers—foreigners who prefer its variety. Product differentiation in this monopolistically competitive global market is the basis for intra-industry trade, as some varieties are imported while others are exported. (The box on “The Gravity Model of Trade” examines an empirical approach that is consistent with trade based on product differentiation and monopolistic competition. It discusses some of the key findings about national economic size, geographic distance, and other impediments to trade.)

With this kind of trade based on product differentiation and monopolistic competition, an additional source of gains from trade for the country is the increase in varieties that become available. Furthermore, trade may also lead to lower prices for the domestic varieties. These benefits accrue to consumers generally. The implications of trade for the well-being of different groups in the country are also modified. First, if most trade is intra-industry, then there may be little pressure on factor prices caused by inter-industry shifts in factor demand. Second, the gains from increased variety reduce the loss to factors that suffer income losses due to Stolper-Samuelson effects. Some may believe they are better off even though they appear to lose income. The second theory is global oligopoly. In some industries, a few large firms account for most global sales, perhaps because internal scale economies are large. Although we do not have a single dominant full theory of oligopoly, we can make several observations about oligopoly and trade. First, scale economies tend to concentrate production in a few production sites. When they were chosen by the firms, these may have been the lowest-cost sites. Over time production tends to continue in these sites, even though they may not remain the lowest cost sites if all sites could achieve the same production scale.

Second, in an oligopoly each large firm should recognize interdependence with the other large firms—its actions and decisions are likely to elicit responses from the other firms. Competition then resembles a game, but it is still not clear how the firms should play the game. If they compete aggressively, then they may earn only normal profits. If instead they restrain their competitive thrusts, then they may be able to earn high profits. However, they may be caught in the prisoners dilemma of competing aggressively, unless they can find some way to cooperate. The fact that oligopoly firms can earn high profits means that it matters where these firms are located (or who owns them). The high profit earned on export sales creates another source of national gains from trade for the exporting country, in the form of better terms of trade, but at the expense of foreign buyers of the imports.