International Trade the World Economy Charles van Marrewijk

International Trade & the World Economy; Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

International Trade & the World Economy; Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

International Trade & the World Economy; Charles van Marrewijk Introduction Joseph Stiglitz (1942 - )

International Trade & the World Economy; Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

International Trade & the World Economy; Charles van Marrewijk Monopoly A monopolist equates marginal revenue (MR) and marginal cost (MC) to determine optimal output; Note: price is higher than MC

International Trade & the World Economy; Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

International Trade & the World Economy; Charles van Marrewijk Monopoly in general equilibrium; autarky Main assumptions • There is a single producer of manufactures; this is a monopoly market • There are many producers of food; the market is perfectly competitive • The markets for factors of production (capital and labor) are also perfectly competitive (the monopolist of manufactures therefore has no monopsony power on its input markets). • All firms maximize profits. • All consumers maximize

International Trade & the World Economy; Charles van Marrewijk Monopoly in general equilibrium; autarky Monopoly producer for manufactures

International Trade & the World Economy; Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

International Trade & the World Economy; Charles van Marrewijk Oligopoly; quantity competition, Cournot-Nash equilibrium Pricing rule:

International Trade & the World Economy; Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

International Trade & the World Economy; Charles van Marrewijk The pro-competitive effect of international trade

International Trade & the World Economy; Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

International Trade & the World Economy; Charles van Marrewijk Reciprocal dumping Cournot competition model with 2 identical countries and positive (iceberg) transport costs; trade results in ‘cross-hauling’ / ‘reciprocal dumping’: product sold at lower mark-up abroad than at home. Producers accept lower mark-up abroad because of perceived higher elasticity of demand (lower market share) Despite ‘pointless and costly’ two way trade welfare increases if the transport costs are not too high as a result of the pro-competitive gains from trade.

International Trade & the World Economy; Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

International Trade & the World Economy; Charles van Marrewijk Application: the Twaron takeover An example of pro-competitive gains from trade in reverse: the Twaron (Dutch firm) takeover by Teijin (Japanese firm) reduces the number of competitors in the aramid fiber market (used for friction, sealing, bullet proof vests, etc. ) from 3 to 2 (other competitor is Du. Pont). Depending on price elasticity this raises the market price and the profit level for the remaining firms.

International Trade & the World Economy; Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

International Trade & the World Economy; Charles van Marrewijk Conclusions • Imperfect competition implies a mark-up of price over marginal costs • Size of mark-up depends on price elasticity of demand degree of competition • Imperfect competition leads to sub-optimal outcome in general equilibrium (deviation between MRS and MRT) • International trade increases market competion and reduces the distortionary effect of imperfect competition (pro-competitive gains)