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Scale Economies and Imperfect Competition in WorldScan

  • Roland de Bruijn
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    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)

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    Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Memorandum with number 140.

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    Date of creation: Feb 2006
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    Handle: RePEc:cpb:memodm:140
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    1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
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