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CHAPTER 9; IMPERFECT COMPETITION

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Presentation on theme: "CHAPTER 9; IMPERFECT COMPETITION"— Presentation transcript:

1 CHAPTER 9; IMPERFECT COMPETITION
International Trade & the World Economy;  Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

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3 CHAPTER 9; IMPERFECT COMPETITION
International Trade & the World Economy;  Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

4 Introduction Joseph Stiglitz (1942 - )
International Trade & the World Economy;  Charles van Marrewijk Introduction Joseph Stiglitz ( )

5 CHAPTER 9; IMPERFECT COMPETITION
International Trade & the World Economy;  Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

6 International Trade & the World Economy;  Charles van Marrewijk
Monopoly A monopolist equates marginal revenue (MR) and marginal cost (MC) to determine optimal output; Note: price is higher than MC

7 CHAPTER 9; IMPERFECT COMPETITION
International Trade & the World Economy;  Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

8 Monopoly in general equilibrium; autarky
International Trade & the World Economy;  Charles van Marrewijk Monopoly in general equilibrium; autarky Main assumptions There is a single producer of manufactures; this is a monopoly market There are many producers of food; the market is perfectly competitive The markets for factors of production (capital and labor) are also perfectly competitive (the monopolist of manufactures therefore has no monopsony power on its input markets). All firms maximize profits. All consumers maximize

9 Monopoly in general equilibrium; autarky
International Trade & the World Economy;  Charles van Marrewijk Monopoly in general equilibrium; autarky Monopoly producer for manufactures

10 CHAPTER 9; IMPERFECT COMPETITION
International Trade & the World Economy;  Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

11 Oligopoly; quantity competition, Cournot-Nash equilibrium
International Trade & the World Economy;  Charles van Marrewijk Oligopoly; quantity competition, Cournot-Nash equilibrium Pricing rule:

12 CHAPTER 9; IMPERFECT COMPETITION
International Trade & the World Economy;  Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

13 The pro-competitive effect of international trade
International Trade & the World Economy;  Charles van Marrewijk The pro-competitive effect of international trade

14 CHAPTER 9; IMPERFECT COMPETITION
International Trade & the World Economy;  Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

15 International Trade & the World Economy;  Charles van Marrewijk
Reciprocal dumping Cournot competition model with 2 identical countries and positive (iceberg) transport costs; trade results in ‘cross-hauling’ / ‘reciprocal dumping’: product sold at lower mark-up abroad than at home. Producers accept lower mark-up abroad because of perceived higher elasticity of demand (lower market share) Despite ‘pointless and costly’ two way trade welfare increases if the transport costs are not too high as a result of the pro-competitive gains from trade.

16 CHAPTER 9; IMPERFECT COMPETITION
International Trade & the World Economy;  Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

17 Application: the Twaron takeover
International Trade & the World Economy;  Charles van Marrewijk Application: the Twaron takeover An example of pro-competitive gains from trade in reverse: the Twaron (Dutch firm) takeover by Teijin (Japanese firm) reduces the number of competitors in the aramid fiber market (used for friction, sealing, bullet proof vests, etc.) from 3 to 2 (other competitor is DuPont). Depending on price elasticity this raises the market price and the profit level for the remaining firms.

18 CHAPTER 9; IMPERFECT COMPETITION
International Trade & the World Economy;  Charles van Marrewijk CHAPTER 9; IMPERFECT COMPETITION Introduction Monopoly Monopoly in general equilibrium; autarky Oligopoly The pro-competitive effect of international trade Reciprocal dumping Application: the Twaron takeover Conclusions

19 Imperfect competition implies a mark-up of price over marginal costs
International Trade & the World Economy;  Charles van Marrewijk Conclusions Imperfect competition implies a mark-up of price over marginal costs Size of mark-up depends on price elasticity of demand and degree of competition Imperfect competition leads to sub-optimal outcome in general equilibrium (deviation between MRS and MRT) International trade increases market competion and reduces the distortionary effect of imperfect competition (pro-competitive gains)

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