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A Theory Of Natural Market Structures: Regulation, R&D, Fdi, International Trade And A Few Curiosities

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  • Hernán Vallejo G

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Abstract

The theories of natural market structures have been well known in economics for a long time. In this paper, a framework for such natural market structures is developed, where natural monopoly, natural oligopoly, perfect competition and monopolistic competition are special cases. The paper explains why with increasing returns to scale at the level of the firm; a given market size; a continuum of firms; complete information and homogeneous goods, there is usually a margin for regulation -most notably when the number of firms in the market is low. The paper shows that R&D, FDI and trade liberalization can improve welfare, and that they can be complements or imperfect substitutes to the need for market regulation. It is argued that when markets are expected to grow, or technologies to change, avoiding policies that prevent entry of firms -such as licences- can reduce significantly the need for regulation while allowing for a more efficient allocation of resources. It is also argued that the need for market regulation can be better explained by the exploitation of economies of scale, than by the existence of economic rents. Finally, the paper shows that when there is a discrete number of firms, the level of profits and the regulatory margins, can be described by a saw""

Suggested Citation

  • Hernán Vallejo G, 2006. "A Theory Of Natural Market Structures: Regulation, R&D, Fdi, International Trade And A Few Curiosities," DOCUMENTOS CEDE 001936, UNIVERSIDAD DE LOS ANDES-CEDE.
  • Handle: RePEc:col:000089:001936
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    File URL: http://economia.uniandes.edu.co/publicaciones/d2006-09.pdf
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    References listed on IDEAS

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    1. Baumol, William J, 1977. "On the Proper Cost Tests for Natural Monopoly in a Multiproduct Industry," American Economic Review, American Economic Association, vol. 67(5), pages 809-822, December.
    2. A. C. Pigou & F. W. Taussig, 1913. "Railway Rates and Joint Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 27(4), pages 687-694.
    3. Perry, Martin K, 1984. "Scale Economies, Imperfect Competition, and Public Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 32(3), pages 313-333, March.
    4. Charles R. Frank, 1965. "Entry in a Cournot Market," Review of Economic Studies, Oxford University Press, vol. 32(3), pages 245-250.
    5. William Novshek, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 473-486.
    6. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    7. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
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    More about this item

    Keywords

    Economies of Scale; Natural Monopoly; Natural Oligopoly; Monopolistic Competition; Regulation; International Trade; Profit Saw; Regulation Saw;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • F10 - International Economics - - Trade - - - General
    • F20 - International Economics - - International Factor Movements and International Business - - - General

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