Question

Why might we expect firms with high research and development (R&D) costs to be more interested in free trade? Explain briefly. Question is from a chapter about monopolistic competition, so please answer with this in mind.

Answer 1

Answer: The firms spend a lot of money on research and development which helps them to produce new innovative products or using advanced technology in production method. If a firm has introduced an innovative product in the market, which other firms cannot produce, that gives them advantage in the market and these firm can act as monopoly, a single seller in the market, which can set their own prices for the product. If the firm has developed advanced technology in the production, then it would gain a competitive advantage and can produce the goods at much lower cost then other firms in the market. This drives out other firms in the market because the firm which has advanced technology can sell the product at cheaper price which helps it to capture the entire market.

The firms in imperfect competition like monopoly or monopolistic competition, are generally interested in the free trade agreement with the rest of the world. This is because, these firm determines the price of their product on their own and not determined by the industry. The price of their products are generally higher than the price would be in perfect competition. Also, if the trading partners imposes some tariff or non tariff barrier on these imported goods, then the price of these imported goods in the importing countries would increase so much that consumers would shift to other products. Note that, the firm can be monopoly or monopolistic in domestic market, but all the firms act as a perfectly competitive firm in the international market. So, these firm also faces the competition from the firms in the domestic market of importing countries. Therefore, if the price of their products in imported country rises due to the imposition of trade barriers, then consumers would shift to those goods which are produced domestically and demand for their product falls in the international market.