1. 1 CHAPTER 1: PRO-COMPETITVE EFFECT OF TRADE 1A: Imports as market discipline 1B: Empirical evidence 1C: Heterogeneity of firms, productivity, mark-ups Paper analysis: Bernard, Jensen & Schott (2006) Globalisation and labour markets, H. Boulhol

2. 2 1A: What drives specialisation? Classical trade theory comparative advantage arises from: -differences in technology -differences in factor endowments under constant returns to scale and perfect competition New trade theory Increasing returns to scale enable to benefit from size/scale effects under imperfect competition

3. 3 1A: Increasing returns to scale i.r.s. rule out perfect competition problem: imperfect competition can be formalised in many ways strategic behaviours of firms shape market structure new mechanisms: i)size effects / increase in number of varieties ii)pro-competitve effects: decrease in mark- ups iii)costs of transporting goods

4. 4 1A: Mark-ups, Price-cost margins

6. 6 1A: Mark-up and Elasticity of perceived demand

7. 1A: Imperfect competition and inefficient allocation 7

8. 1A: Trade intensifies competition Gains from trade can arise from dissipation of rents “Oldest insight” in the area of trade policy under imperfect competition Imports increase competition by bringing prices closer to m.c. (reduced market power) 8

9. 1A: Mechanism Increase in the elasticity of the demand perceived by firms facing import competition Effective entry of new (foreign) competitors displace low efficient (domestic) firms Domestic producers are likely to face a fall in their domestic market share Domestic concentration might increase, while total concentration might decrease 9

10. 1A: Pro-competitive effect of trade 10

11. 1A: Beneficial effect in terms of welfare Reduced market power Relative marginal utility closer to relative marginal cost Better allocation of resources across sectors Beware: competition effect on welfare might not be monotonous: too intense competition might deter innovation Effect on aggregate productivity (Section 1C) Effect on worker / manager effort 11

12. 1A: Imports as product market discipline 12

13. 1A: Dumping Hypothesis: 1) imperfect competition + fixed costs 2) segmented markets: domestic residents cannot easily purchase goods intended for exports Price discrimination: imperfect competition implies that firms do not necessarily charge the same price for goods that are exported and those sold to domestic buyers Each firm practices dumping in the foreign market as a result of total profit maximisation 13

14. 1A: Dumping Dumping is the most common form of price discrimination in international trade: a firm charges a lower price for exported goods Trade policy: dumping is regarded as unfair (controversial) special rules and penalties 14

15. 1A: Intuition behind dumping imperfectly integrated markets (transport costs, trade and cultural barriers) larger share in home than in foreign markets foreign sales are more affected by their pricing lower margin on exports 15

16. 1A: Dumping can generate trade If firms are identical + homogenous good then no dumping = no trade (because of transport costs) But, incentive to limit the quantity sold domestically (to maintain higher price) + sell abroad at lower price (still above mc) = more profits Intra-industry trade Welfare? Reduced market power vs wasteful to ship the same (or close substitute) good 16

17. 1A: Reciprocal dumping (B & K, 1983) Segmented markets, Cournot competition (no interaction between firms under monopolistic comp.) good Z, price p, * means foreign constant marginal cost, c fixed costs, F iceberg transport cost, g < 1 : marginal cost of foreign sales = c/g x : output of the domestic firm sold at home y : output of the foreign firm sold at home x* : output of the domestic firm sold abroad y* : output of the domestic firm sold abroad 17

18. 1A: Reciprocal dumping (B & K, 1983) 18

19. 1A: Reciprocal dumping (B & K, 1983) 19

20. 1A: Reciprocal dumping (B & K, 1983)

21. 1A: Welfare effect of dumping Size effect (+) Pro-competitive effect (+) Transport costs (-) Overall effect is ambiguous Result 1: trade is beneficial when transport costs are sufficiently low, and detrimental when high Result 2: with free entry, trade is beneficial unambiguously 21

22. 22 Chapter 1: References