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

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Author Info
Leopoldo Yanes (School of Economics, The University of Queensland)

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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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  2. Nelson, Richard R. & Pack, Howard, 1998. "The Asian miracle and modern growth theory," Policy Research Working Paper Series 1881, The World Bank. [Downloadable!]
    Other versions:
  3. Jagdish Bhagwati & T. N. Srinivasan, 2002. "Trade and Poverty in the Poor Countries," American Economic Review, American Economic Association, vol. 92(2), pages 180-183, May. [Downloadable!]
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  6. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, vol. 11(4), pages 531-551, November. [Downloadable!] (restricted)
  7. Aghion, Philippe & Antras, Pol & Helpman, Elhanan, 2007. "Negotiating free trade," Journal of International Economics, Elsevier, vol. 73(1), pages 1-30, September. [Downloadable!] (restricted)
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  8. Satya P. Das & Subhadip Ghosh, 2006. "Endogenous trading bloc formation in a North-South global economy," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 809-830, August. [Downloadable!] (restricted)
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  9. J. Jaskold Gabszewicz & Avner Shaked & John Sutton & J.F. Thisse, 1981. "Price Competition Among Differentiated Products: A Detailed Study of a Nash Equilibrium," STICERD - Theoretical Economics Paper Series 37, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  11. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 49(1), pages 3-13, January. [Downloadable!] (restricted)
  12. Bohm Volker, 1994. "The Foundation of the Theory of Monopolistic Competition Revisited," Journal of Economic Theory, Elsevier, vol. 63(2), pages 208-218, August. [Downloadable!] (restricted)
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