International Trade under Imperfect Competition

International Trade under Imperfect Competition

The problem of international trade under conditions of monopolistic or imperfect competition, as these terms are used by Professor Chamberlin' and by Mrs. Robinson, has received little attention up to the present.' This is probably due to two main reasons. In the first place, the question seems to be one of little practical importance, since the most important articles of international trade are raw materials or staple commodities which are generally produced under conditions of perfect competition. The second and perhaps even more cogent reason is that it seems to be almost impossible to arrive at any definite conclusions regarding the question whether international trade will take place, and if it does, to what extent and with what result, when the commodities are produced under imperfect competition (Stewart, 1989).

Mr. Beach concludes that the higher costs of production and the smaller output under imperfect competition will cause the volume of trade also to be smaller than it would be under perfect competition: "If monopolistic competition prevailed throughout the economic system, the volume of international trade would generally be less than it would be under pure competition. The higher costs of production and the reduction in output would tend to restrict foreign trade as well as domestic trade" he does not; however, answer the question, whether foreign trade would contract in the same proportion as the volume of production. It seems impossible to reach any general and unequivocal conclusions in this field. The results of such a study necessarily remain unsatisfactory. The number of cases for which definite statements may be reached is very limited, and, moreover, even these are not the most likely ones, most of the cases of more practical importance giving only very unsatisfactory results (Shiozawa, 2007).

The present article will therefore be confined to ascertaining which tendencies will predominate, or what will be their degree of probability under various given conditions. Without entering into the points of distinction between Professor Chamberlin's "monopolistic competition" and Mrs. Robinson's "imperfect competition," we shall base the following analysis on the Chamberlinian concept. The main characteristics of this market situation may be summed up as follows: (1) each firm produces under decreasing costs; (2) each firm is confronted with a downward sloping demand curve, resulting from the imperfect mutual substitutability of the different product varieties. As to the relative position of the cost and demand curves, there may be tangency, or the demand curve may intersect the cost curve at two points only a short distance apart, allowing for small profits. The essential criterion, however, is that both the points of intersection are situated to the left of the optimum point, so that production cannot be carried on up to this point. (3) Each producer can influence the position or the shape of the demand curve by incurring certain selling costs (Krugman, 1988).

The questions whether and to what extent international trade will take place and how beneficial it will be under the conditions of perfect competition ...