Monopolistically Competitive Markets and Gains From Trade

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Monopolistically competitive markets and gains from trade Introduction The neo-classical models of international trade provide powerful tools to understand the gains from trade through international division of labour. An analysis of the common assumption these models rest on reflects they all assume perfect competition between the firms. However, in the reality, we can observe that some for industries, the competition on the market is seriously impaired. Hence, the analysis of the gains from trade can not be explained by these neo-classical models. New theories of trade have tried to understand the impact of trade liberalisation on such markets. Is competition on some markets impaired as a result of market fundamentals and if it is, can these markets make the benefit of trade liberalisation? If countries can partly solve market failure by opening up to trade on paper, are these gains from trade effectively observed in the real life? In this article, we will first try to analyse the reasons for a certain lack of competition, th effeciency problems it leads to and how trade liberalisation can temperate these problem. Then we will see to what extent the remedies have been observed in the real economic life. 1. Monopolistic competition and international trade. The gains from trade in the case of monopolistically competition market have been pictured by Krugman. What do these gains consist in? 1.1 Internal economies of scale as a source of market failure The neo-classical theories of trade, i.e. the Heckscher-Ohlin model, rest on the assumption that perfect competition rules the firms decisions. However, in the reality we can observe that the markets on which internal economies of scale occur present ... ... middle of paper ... ...ductive firms rather than an improvement of competition. Still, since the company have to face abroad competition, these two visions can be compatible. A limit to gains of trade on monopolistically competitive market we can point out is when a firm, instead of facing its new competitors fairly, practice dumping practices, which are prohibited by the WTO. Word count: 1960 Bibliography Part I International economics : theory and policy, 5th Edition, Addison-Wesley, 2000, P. Krugman and R, Obstfeld (figure 1.1, 1.2, 1.3) International economics, 3rd Edition, Macmillan, 1994, Sèodersten, Bo Part II International economics, 3rd Edition, Macmillan, 1994, Sèodersten, Bo (figure 2.1) New evidence o the gains from trade in Review of World Economics, 142(4), 2006, R. Feenstra General Agreement on Tariffs and Trade 1994, website of the World Trade Office www.wto.org

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