Oligopoly and Trade

Oligopoly means competition among the few, and the study of markets with a relatively small number of large firms is an important branch of industrial organisation and microeconomics more generally. However, it plays a smaller role in the theory of international trade. From its inception in the work of Ricardo in 1817 until the 1980s, trade theory was dominated by perfectly competitive models. What is sometimes called the ‘new trade theory’ revolution from 1979 onwards led to a surge of interest in the implications for trade of imperfectly competitive models.1 Since then, two different routes to incorporating imperfect competition into trade theory have been explored, so different that the process could be described as two revolutions rather than one. On the one hand, monopolistically competitive models of large-group competition have been applied to the study of intra-industry trade and a host of other topics; on the other hand, oligopolistic models have been applied to both positive and normative questions. Of these two, monopolistic competition quickly became the preferred approach, so much so that, in the words of Paul Krugman, it could be said that there are now ‘Two and a Half Theories of Trade’, with the theory of oligopoly a poor relation of the two dominant paradigms, perfect and monopolistic competition.2