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Imperfect Competition and the Theory of Managed Trade

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  • Mohammad Amin

Abstract

We analyze the role of imperfect competition in explaining the relationship between temporary surges in trade-volumes and the level of cooperation in trade policy that can be sustained between countries in a repeated game framework. Imperfectly competitive markets are characterized by a mark-up which is the wedge between equilibrium price and the marginal cost of production. Absent domestic policy tools, gains from protectionist policies are shown to depend positively on the size of the mark-up in the domestic import-competing sector, which is in addition to the conventional terms-of-trade related benefits. A temporary surge in trade-volume due to a supply-side shock lowers the industry mark-up making protectionist policies less desirable. This counters the increase in the terms-of-trade related benefits due to higher trade-volume. The net effect of these two competing forces determines whether periods of abnormally high trade-volumes feature more or less cooperation along the equilibrium path of the repeated game. We identify simple conditions distinguishing between these two outcomes thereby establishing the pattern of "managed trade" under imperfect competition. A sharp distinction is drawn between demand side and supply side shocks. We suggest a simple generalization of the results to other forms of distortions.

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File URL: http://128.118.178.162/eps/it/papers/0402/0402003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Trade with number 0402003.

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Length: 31 pages
Date of creation: 05 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwpit:0402003

Note: Type of Document - pdf; prepared on Win98; pages: 31
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Web page: http://128.118.178.162

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Keywords: Managed Trade; Imperfect Competition; Repeated Game; Trade Policy;

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  1. Kyle Bagwell & Robert W. Staiger, 1989. "A Theory of Managed Trade," Discussion Papers 801, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
  3. Maggi, G & Rodriguez-Clare, A, 1996. "The Value of Trade Agreements in the Presence of Political Pressures," Papers 180, Princeton, Woodrow Wilson School - Public and International Affairs.
  4. Gros, Daniel, 1987. "A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade," Journal of International Economics, Elsevier, vol. 23(3-4), pages 357-367, November.
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  8. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
  9. Staiger, Robert W., 1995. "International rules and institutions for trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 29, pages 1495-1551 Elsevier.
  10. Kyle Bagwell & Robert W. Staiger, 1997. "An Economic Theory of GATT," NBER Working Papers 6049, National Bureau of Economic Research, Inc.
  11. Venables, Anthony J., 1982. "Optimal tariffs for trade in monopolistically competitive commodities," Journal of International Economics, Elsevier, vol. 12(3-4), pages 225-241, May.
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  13. Kyle Bagwell & Robert W. Staiger, 2004. "The Economics of the World Trading System," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524341, December.
  14. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
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