ECONOMICS 3150B Lecture 16 November 18, 2004

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ECONOMICS 3150BLecture 16November 18, 2004
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Monopolistic Competition Model

• Extension of H-O model with internal economies of
  scale and monopolistic competition
• Assumptions
• Two countries
• Two products Y1 heterogeneous product subject
  to economies of scale Y2 homogeneous product
  with constant returns to scale
• Two factors of production
• Y1 uses X1 relatively more intensively
• A has relative abundance of X1
• Outcomes
• A net exporter of Y1, net importer of Y2
• Both intra-industry (Y1) and inter-industry trade
  (Y1, Y2)
• B will produce and export some varieties of Y1,
  but be a net importer

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Monopolistic Competition Model

• Outcomes (contd)
• No income distribution effects from
  intra-industry trade
• Pattern of intra-industry trade cannot be
  predicted
• A will produce more varieties, but cannot predict
  which ones
• Adjustment costs as some producers of Y!
  disappear in both countries
• Relative importance of intra and inter-industry
  trade depends on how similar are the two
  countries the more similar the more important
  intra-industry trade
• If B larger country, no differences in relative
  availabilities of factors of production and no
  differences if factor intensity of production
• B net exporter of Y1 more firms and varieties
  pre-trade

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Intra-Industry Trade

• Intra-industry trade often takes the form of
  production of specialized, skill or
  technology-intensive components in one country
  and assembly in another country
• Nortel develops a technology manufactured by an
  EMS company, perhaps in Canada or in some other
  country (costs and productive/ technology
  capacity) then sold as part of system or network
  by Nortel

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Intra-Industry Trade

• Competitive advantage and introduction of new
  product/variety
• Caters to domestic demand (tastes, income levels)
  
• Uses familiar technology
• PLC growth in domestic demand ? entry expansion
  of demand in other markets
• Small size initially of foreign markets ? with
  economies of scale, supply foreign markets from
  domestic plants
• Growth in foreign markets ? expansion of
  production, creation of subsidiaries as
  consolidation reduces number of competitors
• Companies with foreign subsidiaries will transfer
  production more quickly

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Dumping

• By firms in A into B
• Price in B below price in A
• P(B) lt AC(A)
• P(B) lt AVC(A)
• Price discrimination
• Elasticity of demand differs between A and B
• Prevent arbitrage
• Warranties
• Price discrimination model
• MC(A) MR(A) MR(B)
• P(A) gt P(B)

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P1
P1(A)
P1(B)
MC(A)
D(B)
MR(B)
MR(A)
D(A)
Y1
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Dumping

• P(B) lt AVC(A)
• Beach-head strategy
• Price in short run lt price in long run
• Improved competitive position in future and
  ability to charge higher price
• P(B) lt AVC(A)
• Learning curve
• AVC in short run gt AVC in long run
• Pricing to move down learning curve and develop
  cost-based competitive advantage
• Lower price increases demand and production per
  period of time

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Dumping

• P(B) lt AVC(A)
• Objective drive competitors out of market to
  monopolize market
• How to distinguish predatory dumping from dumping
  based on competitive behaviour not aimed at
  monopolization?
• Substitute domestic competition law for
  anti-dumping provisions in trade agreements ?
  companies may be driven out of market before case
  is resolved

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Mobility of Labour

• H-O model
• 2 factors of production skilled and unskilled
  labour (LS, LU)
• A has relative abundance of LS ? WS/WUA lt
  WS/WUB
• Y1 uses LS more intensively
• LU incentive to migrate from B to A and/or
• LS incentive to migrate from A to B
• Depends upon absolute wage rates (expressed in
  same currency) in addition to relative wage rates
  and mobility costs
• Migration, if it occurs, will continue until
• LS/LUA LS/LUB
• WS/WUA WS/WUB
• WSE/PA WS/PB and WUE/PA WU/PB
• Migration eliminates basis for trade
• Income distribution effects