Evidence on Imperfect Competition and Strategic Trade Theory

Strategic trade theory shows that government intervention in markets with small numbers of traders can boost the welfare of a country relative to free trade. This survey critically assesses the empirical evidence regarding this possibility. One finding is that while many international food and agricultural markets are characterized by oligopoly, price-cost markups tend to be small, and the potential gains from intervention are modest at best. In turn, existing government interventions such as agricultural export subsidies are generally not optimal in a strategic trade sense. The evidence suggests that oligopoly by itself is not a sufficient rationale for deviating from free trade in international markets.