International Trade Policy for Oligopolistic Industries

Almost all of the received theory of international trade, positive and normative, is based on the model of atomistic competition. All individual consumers and producers are assumed to be price-takers. It is recognised that a country may have monopoly power in trade, but this is supposed to be exercised by its government through the use of tariffs. In reality, it is becoming increasingly evident that a significant proportion of international trade takes place in imperfectly competitive markets. Here the individual producers and sellers are aware of their monopoly power, and act to profit from it. The resulting market equilibrium, be it pure monopoly, oligopoly, or monopolistic competition, differs from the textbook Walrasian kind. The determinants and patterns of trade are different, and are differently affected by commercial policy. A new framework of theoretical analysis is therefore required for a proper understanding of many current issues of tradf, and of trade policy. Such research is still in its infancy, but is growing rapidly. This lecture is intended to provide a consolidation, and some extension, of the work. I shall begin by describing the new issues that arise when trade is imperfectly competitive, and some new features of the analysis. Then I shall give a brief and somewhat selective review of the literature. Finally, I shall construct a model that synthesises and extends some of the work on trade policy in the context of oligopoly.