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Introducing Imperfect Competition in CGE Models: Technical Aspects and Implications

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  • Roberto Roson

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Abstract

This paper considers the technical aspects and the consequences, in terms of simulation results and policy assessment, of introducing imperfect competition in a CGE model. The modifications to the standard CGE framework needed to model imperfect competition in some industries are briefly discussed. Next, the paper examines whether, how much and why, those changes may affect the qualitative output a typical simulation experiment. It is argued that technical choices made in designing the model structure may have a significant impact on the model behavior. This is especially evident when the model output of an imperfect competition closure is compared with the one of a standard closure, assuming perfect competition. As an illustration, a simulation of agricultural trade liberalization is analyzed. Results from the same simulation exercise, but produced by alternative model formulations (one standard competitive and three imperfect competition variants) are presented and discussed. It is found that having imperfect competition in a CGE model does matter in terms of simulation results. Furthermore, alternative formulations of imperfect competition typically bring about quite different findings and implications.

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File URL: http://hdl.handle.net/10.1007/s10614-006-9034-6
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Bibliographic Info

Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 28 (2006)
Issue (Month): 1 (August)
Pages: 29-49

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Handle: RePEc:kap:compec:v:28:y:2006:i:1:p:29-49

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Web page: http://www.springerlink.com/link.asp?id=100248
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Related research

Keywords: computable general equilibrium models; imperfect competition; oligopolistic models; economies of scale; empirical industrial organization; agriculture; trade liberalization; trade policy;

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  1. Richard Harris, 1983. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," Working Papers 524, Queen's University, Department of Economics.
  2. Mohamed Hedi Bchir & Yvan Decreux & Jean-Louis Guérin & Sébastien Jean, 2002. "MIRAGE, a Computable General Equilibrium Model for Trade Policy Analysis," Working Papers 2002-17, CEPII research center.
  3. Joaquim Oliveira Martins & Stefano Scarpetta & Dirk Pilat, 1996. "Mark-Up Ratios in Manufacturing Industries: Estimates for 14 OECD Countries," OECD Economics Department Working Papers 162, OECD Publishing.
  4. Thomas W. Hertel & Padma Swaminathan, 1996. "Introducing Monopolistic Competition into the GTAP Model," GTAP Technical Papers 309, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  5. Harrison, Glenn W & Rutherford, Thomas F & Tarr, David G, 1997. "Quantifying the Uruguay Round," Economic Journal, Royal Economic Society, vol. 107(444), pages 1405-30, September.
  6. Kaludura Abayasiri-Silva, 1999. "Market Power in Australian Manufacturing Industry: A Confirmation of Hall's Hypothesis," Centre of Policy Studies/IMPACT Centre Working Papers g-132, Victoria University, Centre of Policy Studies/IMPACT Centre.
  7. Francois, Joseph, 1998. "Scale Economies and Imperfect Competition in the GTAP Model," GTAP Technical Papers 317, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  8. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, December.
  9. Harrison, W Jill & Pearson, K R, 1996. "Computing Solutions for Large General Equilibrium Models Using GEMPACK," Computational Economics, Society for Computational Economics, vol. 9(2), pages 83-127, May.
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Cited by:
  1. Raymond Li, 2012. "Imperfect competition in the international coal industry – does it matter?," Economics Bulletin, AccessEcon, vol. 32(3), pages 1821-1830.
  2. Innwon Park, 2006. "East Asian Regional Trade Agreements: Do They Promote Global Free Trade?," Pacific Economic Review, Wiley Blackwell, vol. 11(4), pages 547-568, December.
  3. Roberto Roson & Francesco Bosello & Enrica De Cian, 2007. "Climate Change, Energy Demand and Market Power in a General Equilibrium Model of the World Economy," Working Papers 2007.71, Fondazione Eni Enrico Mattei.
  4. Oyamada, Kazuhiko, 2014. "Neutrality in the choice of number of firms or level of fixed costs in calibrating an Armington-Krugman-Melitz encompassing module for applied general equilibrium models," IDE Discussion Papers 465, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  5. Roberto Roson & Kazuhiko Oyamada, 2014. "Introducing Melitz-Style Firm Heterogeneity in CGE Models: Technical Aspects and Implications," Working Papers 2014:04, Department of Economics, University of Venice "Ca' Foscari".
  6. Braymen, Charles B., 2011. "Sectoral structure, heterogeneous plants, and international trade," Economic Modelling, Elsevier, vol. 28(4), pages 1967-1976, July.
  7. Oyamada, Kazuhiko, 2013. "Parameterization of applied general equilibrium models with flexible trade specifications based on the Armington, Krugman, and Melitz models," IDE Discussion Papers 380, Institute of Developing Economies, Japan External Trade Organization(JETRO).

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