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R&D, Market Structure and Trade: A General Equilibrium Analysis

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Abstract

That many industries exhibit highly concentrated market structures, even at the global level, calls for trade theoretic analyses which can accommodate this fact. We present a two-country, general equilibrium analysis in which high concentration levels can be sustained through the interaction between R&D and market structure, whilst emphasizing the effects of trade and industrial policy on wages and welfare. The world economy is characterized by asymmetric initial conditions and populations. If initial conditions are very different, freetrade reduces wages in a backward economy, relative to autarky. However, the advanced economy always achieves higher wages through trade. Welfare gains from trade arise when economies are either very similar or very different. In the intermediate case, when initial conditions are not too different, and the advanced economy’s population is not very large, the backward economy loses from trade, while the advanced economy gains. A compensation mechanism is feasible and would ensure that no nation loses from trade. The analysis provides formal criteria for the choice of trade partners and the formation of trade blocs. Moreover, industrial policy (an R&D subsidy) is shown to be neutral or ineffective, in the sense that it does not affect any real magnitudes.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 361.

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Date of creation: 2008
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Handle: RePEc:qld:uq2004:361

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Keywords: International trade; industrial policy; product quality; R&D; market structure; initial conditions;

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  1. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, Elsevier, vol. 9(4), pages 469-479, November.
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  12. Jaskold Gabszewicz, Jean & Vial, Jean-Philippe, 1972. "Oligopoly "A la cournot" in a general equilibrium analysis," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(3), pages 381-400, June.
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  14. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  15. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, Elsevier, vol. 11(4), pages 531-551, November.
  16. J Peter Neary, 2002. "The Road Less Travelled - Oligopoly and Competition Policy in General Equilibrium," Working Papers, School Of Economics, University College Dublin 200222, School Of Economics, University College Dublin.
  17. Ruffin, Roy J., 2003. "Oligopoly and trade: what, how much, and for whom?," Journal of International Economics, Elsevier, Elsevier, vol. 60(2), pages 315-335, August.
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