class9 Flashcards
Monopolistic competition assumptions (no trade)
1: Firms produce using a technology with increasing returns to scale in an imperfect competition market structure
2: Firms produce differentiated goods
3: Symmetric firms
4: There are “many” firms in the industry.
5: Marginal revenue lies below the demand curve
6: Free entry and exit: profits are zero in the long run.
Trade in monopolistic competition
Increase market size; reduce average cost; CC shift down
Price decrease, nb of firms increase, variety of goods increase
Intra-industry trade
2 way exchanges of similar goods
Economic integration generates winners and losers among different types of firms.
Better performing firms (lower costs) expand and worse performing firms (higher costs) contract. The least productive firms are forced to exit.
Therefore the overall efficiency of the industry improves increasing industry productivity.
Forming an integrated world market bigger than national markets, countries trade improves the trade-off between scale and variety.
Same effect as growth of a single country-market.
Starting with 2 isolated markets;
With trade, the combined market has more firms than each individual market
But there are fewer firms with trade than initially if
we take the sum of the two markets
Trade induces an exit of firms in each market
Each firm produces more than in Autarky (to reduce average costs), the combined number of firms has to decrease
Effect of trade in LR
Lower prices, lower markups
More brands available to consumers
Each firm produces more
But total number of firms decreases
Firms have long-run zero profits, with or without trade
Internal economies of scale
Product differentiation and internal economies of scale lead to trade between similar countries with no comparative advantage differences between them
Advantages Intraindustry trade
-Gains from Specialization and Learning
-splitting up the value chain
-Dynamic Comparative Advantage: Comparative advantage can be dynamic when new skills are developed and as the value chain is split up in new ways.
Disadvantages Intra-industrial trade
-Complexity: Global supply chains are complex and involve many different stakeholders
-Regulatory risks: Global supply chains must comply with numerous regulations and laws in different countries.
-Driver shortages, logistics provider capacity issues, shipping delays, increased freight costs, depleted inventory levels, labor shortages and demand peaksare driving discussions and require attention.
-Supply chain disruptions lead toshortages of key goods, price inflation, factory closures, unloaded shipping containers and negative effects on a nation’s economic wellbeing.
If trade costs drop..
Existing exporters: sales and profits expand.
Existing local firms: sales and profits contract as they face more foreign competition.
Entry of new exporters: for some larger high-productivity firms that only sell on the domestic market, it now becomes profitable to export.
Exit of some low-productivity firms: for some low-productivity firms that only sold on the domestic market, the increased foreign competition pushes them out of the market.
Dumping
Dumping occurs when a country exports a product at a price that is lower in the foreign importing market than the pricein the exporter’s domestic market
Becausedumping typicallyinvolves substantial export volumes of aproduct, it often endangersthe financial viability of the product’s manufacturers or producers in the importing nation.
Dumping to maximize profits → the firm will sell :
at a high price PDOM in the domestic market.
at a low price PFOR in foreign markets until marginal costs exceed this price.
Dumpling is unfair when
Dumping is only considered an unfair practice if it involves predatory pricing: foreign firm uses temporary low prices to drive its competitors out of the market and then raise prices.
Dumping is not necessarily unfair..
Price discrimination and dumping may occur only if:
imperfect competition allows firms to influence market prices.
markets are segmented so that goods are not easily bought in one market and resold in another.
Dumping can then be a profit-maximizing strategy:
A firm with a higher marginal cost chooses to set a lower markup over marginal cost.
Therefore, an exporting firm will respond to the trade cost by lowering its markup for the export market.
Problem with anti-dumping
Setting different prices for different customers can be a legitimate business strategy
Difficult to prove that foreign firms charge higher prices to domestic firms than to export customers
A firm may be willing to sell a product for a loss why it is lowering its costs through experience or breaking into a new market.
