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Foreign Trade under imperfect competiton. Aim: From comparative advantage to competitive advantage comparative advantage: Differnces between nations competitive.

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Presentation on theme: "Foreign Trade under imperfect competiton. Aim: From comparative advantage to competitive advantage comparative advantage: Differnces between nations competitive."— Presentation transcript:

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 Extern steigende Skalenerträge Vorbereitender Exkurs

5 Idee Die Skalenerträge beruhen auf externen Effekten, sie treten Innerhalb der Branche (und der Nation) Aber außerhalb der Unternehmen auf

6 Ursache 1 Spezialisierte Zulieferer Größere Branche, größere Spezialisierung der Zulieferer, geringere Kosten Beispiel: Silicon Valley

7 Ursache 2 Pool spezialisierter Arbeitskräfte Größere Branche, geringere Wahrscheinlichkeit von Arbeitskräftemangel Größere Branche, geringere Wahrscheinlichkeit der Arbeitslosigkeit Beispiel: Krugmanns 50/150/200

8 Ursache 3 Knowledge Spillovers Räumlich konzentrierte Branche, informeller Austausch über Ideen, Probleme etc. Beispiel: Silicon Valley

9 Kostenverläufe bei extern steigenden Skalenerträgen X DK xixi X1X1 DK i (X 1 ) X0X0 DK i (X 0 ) xi*xi*

10 Angebotskurve der Branche x A=DK

11 Und der Aussenhandel ? Bigger is better! Wer zuerst kommmt malt zuerst! (First mover advantage)

12 Bigger is better! PHPH PFPF x A DHDH DFDF Komparativer Vorteil aufgrund von Größe !

13 Wer zuerst kommt malt zuerst! PTPT PSPS x DK Schweiz DWDW DK Taiwan Komparativer Vorteil aufgrund von früherer Spezialisierung Pfadabhängigkeit

14 Freihandel ? Protektionismus? PTPT PSPS x DK Schweiz DSDS DK Taiwan Vorübergehender Protektionismus kann gut sein Erziehungszoll DTDT

15 Internally decreasing costs

16 Costs given economies of scale dK/dx x Revenue Costs K/x p x Loss

17 Natural monopoly dK/dx p N x Marginal Revenue K/x pMpM xMxM Cournot Solution

18 Global economies to scale p H =p W GK p N H = GE H+F GE H K/x xHxH x N H+F xWxW

19 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!

20 National decreasing costs GK p N x GE DK pHpH xHxH x HT in H x HT für H pWpW

21 Welfare effects GK p N x GE DK pHpH xHxH x HT in H x HT für H pWpW

22 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

23 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

24 The most common form of price discrimination in international trade A pricing practice in which a firm charges a lower price for an exported good than it does for the same good sold domestically Dumping

25 Dumping can occur only if two conditions are met: Imperfectly competitive industry Segmented markets Given these conditions, a monopolistic firm may find that it is profitable to engage in dumping. Dumping

26 Die Logik des Dumping ExportsDomestic sales Cost, C and Price, P Quantities produced and demanded, Q MC D FOR = MR FOR MR DOM D DOM 2 P FOR P DOM Q DOM Q TOTAL Total output 1 3

27 Handelspolitik It is a controversial issue in trade policy and is widely regarded as an unfair practice in international trade. Example: As of April 2002, the United States had anti-dumping duties on 265 items from 40 different countries.

28 A situation in which dumping leads to two- way trade in the same product Reciprocal Dumping

29 Die Logik des reziproken Dumping Zwei identische Monopole Handel wird möglich. Märkte segmentiert. Es existieren Transportkosten. Für etabliertes Monopol ist MR=MC. Für Newcomer am Anfang: MR=P

30 Wohlfahrtseffekte Its net welfare effect is ambiguous: It wastes resources in transportation. It creates some competition.

31 Produktdifferenzierung

32 Grundlegende Unterscheidung Horizontale Produktdifferenzierung Über Geschmack lässt sich nicht streiten Vertikale Produktdifferenzierung Bessere Qualität/Schlechtere Qualität

33 Monopolistische Konkurrenz Each firm is assumed to be able to differentiate its product from its rivals. Horizontale Produktdifferenzierung Each firm is assumed to take the prices charged by its rivals as given. Freier Markteintritt

34 Are there any monopolistically competitive industries in the real world? Some industries may be reasonable approximations (e.g., the automobile industry in Europe) The main appeal of the monopolistic competition model is not its realism, but its simplicity. Realismus?

35 Two kinds of behavior arise in the general oligopoly setting that are excluded by assumption from the monopolistic competition model: Collusive behavior: Can raise the profits of all firms at the expense of consumers May be managed through explicit agreements or through tacit coordination strategies Strategic behavior: Is adopted by firms to affect the behavior of competitors in a desirable way Deters potential rivals from entering an industry Limitations of Monopolistic Competition

36 Imagine an industry consisting of a number of firms producing differentiated products. We expect a firm: To sell more the larger the total demand for its industrys product and the higher the prices charged by its rivals To sell less the greater the number of firms in the industry and the higher its own price Erste Intuitionen

37 where: – Q is the firms sales – S is the total sales of the industry – n is the number of firms in the industry – b is a constant term representing the responsiveness of a firms sales to its price – P is the price charged by the firm itself – A particular equation for the demand facing a firm that has these properties is: Q = S x [1/n – b x (P – P)] (6-5) Ein einfaches Modell –P is the average price charged by its competitors

38 All firms in this industry are symmetric The demand function and cost function are identical for all firms. The method for determining the number of firms and the average price charged involves three steps: We derive a relationship between the number of firms and the average cost of a typical firm. We derive a relationship between the number of firms and the price each firm charges. We derive the equilibrium number of firms and the average price that firms charge. Marktgleichgewicht

39 –How do the average costs depend on the number of firms in the industry? Number of Firms and Average Cost –Under symmetry, P = P, equation (6-5) tells us that Q = S/n but equation (6-4) shows us that the average cost depends inversely on a firms output. –We conclude that average cost depends on the size of the market and the number of firms in the industry: AC = F/Q + c = n x F/S + c (6-6) –The more firms there are in the industry the higher is the average cost.

40 The price the typical firm charges depends on the number of firms in the industry. The more firms, the more competition, and hence the lower the price. In the monopolistic competition model firms are assumed to take each others prices as given. Number of Firms and Price –If each firm treats P as given, we can rewrite the demand curve (6-5) in the form: Q = (S/n + S x b x P) – S x b x P (6-7)

41 Profit-maximizing firms set marginal revenue equal to their marginal cost, c. This generates a negative relationship between the price and the number of firms in the market which is the PP curve: P = c + 1/(b x n) (6-10) The more firms there are in the industry, the lower the price each firm will charge. Number of firms and price

42 PP Cost C, and Price, P Number of firms, n CC P3P3 AC 3 n3n3 n1n1 AC 1 n2n2 AC 2 E Equilibrium in a Monopolistically Competitive Market P2,P2, P1P1

43 The downward-sloping curve PP shows that the more firms, the lower the price each firm will charge. The more firms, the more competition each firm faces. The upward-sloping curve CC tells us that the more firms there are, the higher the average cost of each firm. If the number of firms increases, each firm will sell less, so firms will not be able to move as far down their average cost curve. Die Gleichgewichtige Anzahl an Unternehmen

44 The monopolistic competition model can be used to show how trade leads to: A lower average price due to scale economies The availability of a greater variety of goods due to product differentiation Imports and exports within each industry (intra-industry trade) Monopolistic Competition and Trade

45 The Effects of Increased Market Size The number of firms in a monopolistically competitive industry and the prices they charge are affected by the size of the market. Monopolistic Competition and Trade

46 Cost C, and Price, P Number of firms, n CC 1 n1n1 P 1 1 PP n2n2 P2P2 2 CC 2 Monopolistic Competition and Trade

47 Gains from an Integrated Market: International trade allows creation of an integrated market that is larger than each countrys market. It thus becomes possible to offer consumers a greater variety of products and lower prices. Monopolistic Competition and Trade

48 Suppose that automobiles are produced by a monopolistically competitive industry. Assume the following: b = 1/30,000 F = $750,000,000 c = $5000 There are two countries (Home and Foreign) that have the same costs of automobile production. Annual sales of automobiles are 900,000 at Home and 1.6 million at Foreign. A Numerical Example

49 Equilibrium in Home

50 Equilibrium in Foreign

51 Integrated Market

52 Summary of Example

53 Assumptions: There are two countries: Home (the capital- abundant country) and Foreign. There are two industries: manufactures (the capital-intensive industry) and food. Neither country is able to produce the full range of manufactured products by itself due to economies of scale. Economies of Scale and Comparative Advantage

54 Home (capital abundant) Foreign (labor abundant) Manufactures Food Trade without increasing returns

55 If manufactures is a monopolistically competitive sector, world trade consists of two parts: Intraindustry trade The exchange of manufactures for manufactures Interindustry trade The exchange of manufactures for food Monopolistic Competition and Trade

56 Home (capital abundant) Foreign (labor abundant) Manufactures Food Interindustry trade Intraindustry trade Trade with Increasing Returns and Monopolistic Competition

57 Main differences between interindustry and intraindustry trade: Interindustry trade reflects comparative advantage, whereas intraindustry trade does not. The pattern of intraindustry trade itself is unpredictable, whereas that of interindustry trade is determined by underlying differences between countries. The relative importance of intraindustry and interindustry trade depends on how similar countries are. Monopolistic Competition and Trade

58 About one-fourth of world trade consists of intra-industry trade. Intra-industry trade plays a particularly large role in the trade in manufactured goods among advanced industrial nations, which accounts for most of world trade. Significance of Intraindustry trade

59 Intraindustry Trade Indexes in the US, 1993

60 Intraindustry trade allows countries to benefit from larger markets. Gains from intraindustry trade will be large when economies of scale are strong and products are highly differentiated. For example, sophisticated manufactured goods. Benefits from Intraindustry Trade

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