lecture 3 - david - the single market

Question 1

what are the advantage of a single market in terms of bigger market?

Answer 1

there is a larger market so the firms face more competition. as a result of this lower prices, there is increased demand for goods and so more is consumed and welfare increases

Question 2

what is the analytical framework for the brander and Krugman model?

Answer 2

• one good
  -two country model (home and foreign)
• fixed entry cost of production and constant marginal cost ( increasing returns to scale
• linear demand curve

Question 3

what are the two versions of the brander and Krugman model?

Answer 3

TWO versions of the model :
-fixed number of firms (one firm per country) there is an autarky (two monopolists) and an open economy (two firms competition on quantities)
- free entry (the number of firms is endogenously determined

Question 4

what is the equation for the iceberg transport costs and what does it represent?

Answer 4

𝑐/𝑔 is the marginal cost of exporting, where 0<𝑔≤1

Question 5

what does the equillibrium in the home market look like?

Answer 5

in the home market, each firm takes a bigger share of their domestic market as it does not face transport costs internally

Question 6

when each firm can sell in domestic and foreign market, what is the equation for which demand is satisfied?

Answer 6

Z= x + y where Z is home demand and x is home firm and y is foreign firm and the equation for foreign demand is Z=x+y* where X* is home firm supply and Y* is foreign firms

Question 7

what is the equation for the mark up for the home firms?

Answer 7

𝜇≡𝑝−𝑐

Question 8

what is the equation for foreign firms?

Answer 8

𝜇∗≡𝑝∗−𝑐/𝑔

Question 9

why is the mark up applied in the domestic market higher than the one applied in the foreign market?

Answer 9

since the countries are selling in the same market and are identical then the Z=Z* which implies that p=P*=Pft. since g<1, it follows the 𝜇>𝜇∗.
equations for markup:
𝜇≡𝑝−𝑐
𝜇∗≡𝑝∗−𝑐/𝑔

Question 10

is there a pro competitive price?

Answer 10

yes, Consumers are able to consume a higher quantity at a lower price under free trade (pro-competitive effect).

Question 11

is there an increase in welfare for all countries due to the pro competitive effect of international trade?

Answer 11

there is a consumer surplus due to lower price of international trade, however some of this increased consumer surplus is cancelled outdue to a reduction of producer surplus as a result of the fall in the markup on monopoly sales. there is a further fall in the mark up on the part of monopoly sales which are now foreign market sales but there is an additional markup on new sales. as a result there may be a benefit or loss to welfare along as the pros outweigh the cons

Question 12

what is the relationshoip between the number of firms and the mark up?

Answer 12

there is a negative relationship between the number of firms and the size of the mark up. this is because the profit maximisation problem of the firm shows that the higher the number of firms, the lower the quantity produced by each firm

Question 13

what does the free entry condition suggest about profits in the long run?

Answer 13

the free entry condition implies that profits are zero in the long run as new firms will join the market driven by a profit motive decreasing profit from existing firms

Question 15

what would be the pro competitive effect that would occur in the EU?

Answer 15

mark up falls and quantity produced increases as there is twice the number of firms competiting in the market

Question 16

what is the industrial restructing that would occur in the EU bigger market?

Answer 16

some firms will exit the market because point A is not feasible ie P<AC
the remaining firms are bigger and also more efficient (better exploit increasing returns to scale)

Question 17

what are the controversies of trade liberalisation?

Answer 17

trade liberalisation is beneficial for the consumers but not necessarily for firms as profits normally fall and some firms exit the market so job losses occur. as a result the incentives to collude can increase as the remaining firms are bigger and governments might be tempted to provide subsidies to national firms which is inefficient and might provoke trade wars