Question

How does imperfect competition explain trade pattern? Make sure you discuss concepts such as oligopoly, intra-industry trade, economies of scale, and so on.

Answer 1

Imperfect competition arises when there is inefficiency in terms of demand and supply and where there is market failure. Where there are all types of market structures, other than perfect competition. Thus it is characterized by the existence of monopoly, oligopoly, monopolistic competition etc. where firms earn huge economic profits and charge price above the market equilibrium.

Thus led by imperfect competition, there are economies of scale gained in countries which leads to trade patterns arising and the firms being able to sell their products at very low average prices because of economies of scale. Economies of scale arise because of the firms being able to scale their production levels at low costs per unit of production. These firms also enjoy tax benefits and subsidies from local governments which determines the trade patterns as the countries are able to grow extensively due to export earnings. Countries thus trade in order to achieve economies of scale.

There is also the case of oligopolies who are a few firms who control the market share in order to retain their respective market shares. They create barriers to entry where countries benefit by importing from such firms based in foreign countries as domestic firms costs of production reduce.

Intraindustry trade takes place led by imperfect competition as country both exports and imports goods which belong to the same industry as there is an increase in innovation led growth and economies of scale as the world market is accessed led by trade.

Thus in this way imperfect competition helps to explain trade pattern as it gives rise to economies of scale, large scale profits and exponential gains from trade. Production is also efficient which increases trade. And firms are able to sell more led by price reductions.