Trade Under Imperfect Competition Flashcards
What dies imperfect competition allow firms to do
Price setters
What do models with imperfect competition I typically feature
Intra-industry trade
Trade characteristics
Between similar countries trading identical/similar goods.
Cost differences not required for gains from trade
Gains may rise from increased competition, EOS or variety
Monopoly - why is MR below demand function (AR) (a level)
As to sell more, must lower price of all units, not just the additional ones.
Monopoly model;
Linear inverse demand:
pA = α − βQ
Q is total output sold in the country
Domestic firm has constant MC of c
In autarky, the firm is a monopolist in its own country, hence Q =qa
Find price and qa
Monopoly diagram
Simple A level diagram
MC = MR
If country A opens to trade with country B, the outcome depends on the market structure in country B
Threat of trade can improve domestic conditions in a country, monopolies may start increasing output and lowering their price due to this.
Consider 2 possible competition types in country B
Large no of perfectly competitive firms
Single producer identical to the monopolist in country A (another monopolist)
If country B has a large number of perfectly competitive firms
B) diagram given foreign firms MC equal domestic
C) diagram if foreign firms MC < domestic MC
D) if foreign MC>
Outcome depends on the productivity of competitive firms in.e MC in producing additional goods
B) perfect competition means set P=MC and at the perfectly competitive quantity (pg 12)
C) foreign firms set a price of Cb and take all of country A’s demand at the lower price. All supplied by foreign firms (pg 13)
D) domestic firm remains a monopolist. If MC is lower than the monopoly price, the domestic firm will set a price just below Cb to capture the entire market.
If country B has a single producer identical to the monopolist in country A
The outcome depends on the type of competition the firms engage in
So it depends on the type of competition: 2 possibility
Bertrand competition
Cournot competition
So if the single firm in B enters the market in A, what is this known as
Duopoly
Bertrand competition
Set prices simultaneously. Consumers want lowest price.
If both charge the same, consumer demand is split evenly between them
Hence what is Bertrand competition the same as
Perfect competition, since competitive price is a Nash equilibrium i.e are competing on price
