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Scale Economies and Imperfect Competition in WorldScan

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  • Roland de Bruijn

Abstract

WorldScan, the CGE model for international policy analysis and long-term scenario studies, is applied regularly at the CPB. The production technology in the model is that of constant returns to scale and the market structure is characterized by perfect competition. However, it is a well known fact that many sectors such as manufacturing and service sectors feature increasing returns and firms compete imperfectly. To give the model more realism, it is therefore necessary to expand the model. Besides that, several research projects require an identification of scale economies in order to perform a sound welfare analysis. In this memorandum, I review the literature on scale economies and imperfect competition and analyze which approach is most suitable to implement in WorldScan. For the objectives at hand it appears most efficient to expand the model with an extended Dixit-Stiglitz approach. Simulations with an aggregated version of WorldScan show that the effects of incorporating scale economies are significant. Evidently, in a liberalisation scenario, sectors with increasing returns can exploit their technology more than sectors with constant returns, implying considerable increases in production and exports for these sectors. Concluding, this expansion of the model allows for an identification of formerly unidentified welfare effects. Download PDF-bestand (564Kbytes)

Suggested Citation

  • Roland de Bruijn, 2006. "Scale Economies and Imperfect Competition in WorldScan," CPB Memorandum 140, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:memodm:140
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    References listed on IDEAS

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    1. 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.
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    1. Christian Dreger & Manuel Artís & Rosina Moreno & Raúl Ramos & Jordi Suriñach, 2007. "Study on the feasibility of a tool to measure the macroeconomic impact of structural reforms," European Economy - Economic Papers 2008 - 2015 272, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    2. Arjan Lejour & Paul Veenendaal & Gerard Verweij & Nico van Leeuwen, 2006. "Worldscan; a model for international economic policy analysis," CPB Document 111.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Hugo Rojas-Romagosa, 2017. "Potential Economic Effects of TTIP for the Netherlands," De Economist, Springer, vol. 165(3), pages 271-294, September.
    4. Jasper Lukkezen & Coen Teulings, 2013. "Optimal fiscal policy," CPB Discussion Paper 242.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    5. de Bruijn, Roland & Kox, Henk & Lejour, Arjan, 2008. "Economic benefits of an Integrated European Market for Services," Journal of Policy Modeling, Elsevier, vol. 30(2), pages 301-319.
    6. Arjan Lejour & Henk Kox & Roland de Bruijn, 2006. "The trade-induced effects of the Services Directive and the country of origin principle," CPB Document 108, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Arjan Lejour & Paul Veenendaal & Gerard Verweij & Nico van Leeuwen, 2006. "Worldscan; a model for international economic policy analysis," CPB Document 111, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Hugo Rojas-Romagosa, 2017. "Potential Economic Effects of TTIP for the Netherlands," De Economist, Springer, vol. 165(3), pages 271-294, September.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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