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Edited by William A. Kerr and James D. Gaisford
Chapter 13: Economies of Scale, Imperfect Competition and Market Size
Michael Benarroch Explaining the causes and consequences of international trade has been a central focus of both the theoretical and empirical literature dealing with international trade. Prior to the 1980s, trade theorists generally employed two international trade models, the Heckscher–Ohlin–Samuelson Model (HOS) and the Ricardian Model, to help understand the world of international economics. Both of these models use a market structure characterized by perfect competition and constant returns to scale (CRS) in production. These models predict that trade will occur across countries with either factor endowment or technological diﬀerences, and across countries that export ‘diﬀerent goods’, interindustry trade. By 1980 however, there was a growing body of empirical evidence that pointed to the fact that not all trade followed this pattern (Grubel and Lloyd 1975). While trade models based on perfect competition shaped trade policy prior to 1980, models with imperfect competition, ‘New Trade Theory’, have gained prominence since that time. These new theories have spawned a generation of trade models based on imperfect competition in product markets, increasing returns to scale (IRS) in production and intra-industry trade (IIT), trade across similar goods. This innovation in trade theory has led to an analysis of international trade and policy with market structures such as oligopolies, monopolies, and monopolistic competition (MC). A central feature of this literature is that trade can occur across either similar countries, countries with the same technologies and factor endowments, or across ‘similar goods’, intra-industry trade. With this in mind, the purpose of...
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