Imperfect Competition and Trade Udayan Roy September 2006

Pro-Competitive Gains From Trade A small country will gain from trade even if it has imperfect competition.small country In fact, it would gain more from trade than an otherwise identical country that has perfect competition. This is because an imperfectly competitive economy will not only enjoy the familiar gains from exchange and gains from specialization, it will also enjoy the so-called pro-competitive gains from trade when producers in its imperfectly competitive markets are exposed to competition from foreign producers

“Small” Country This is a country that is so small relative to the rest of the world that nothing could possibly happen there that would affect worldwide free trade prices.

Price World Price Demand Supply Quantity Imports A B C D F E Autarky Monopoly Price Production, free trade Consumption, free trade Autarky Monopoly Production and Consumption The market is a monopoly during autarky. Free trade ends the monopoly by introducing foreign competition. Autarky: monopoly Autarky: perfect competition

Trade With Pre-existing Monopoly—Welfare AutarkyFree Trade Consumer Surplus AABCD Producer Surplus BEEF Total SurplusABEABCDEF The benefit from trade is C, D and F. F is the pure benefit from trade. C and D are due to the increase in competition as a result of trade.

Free Trade With Monopoly in Place If monopoly (or any other form of market imperfection) already exists during autarky, opening up a “large” economy to free trade may make matters worse.