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Imperfect Competition and the Theory of Managed Trade

  • Mohammad Amin

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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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
Contact details of provider: Web page: http://econwpa.repec.org

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  1. 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.
  2. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
  3. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
  4. Kyle Bagwell & Robert W. Staiger, 1997. "An Economic Theory of GATT," NBER Working Papers 6049, National Bureau of Economic Research, Inc.
  5. Bagwell, Kyle & Staiger, Robert W., 1997. "Multilateral tariff cooperation during the formation of customs unions," Journal of International Economics, Elsevier, vol. 42(1-2), pages 91-123, February.
  6. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September.
  7. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, vol. 35(1-2), pages 1-22, August.
  8. Kyle Bagwell & Robert W. Staiger, 1988. "A Theory of Managed Trade," NBER Working Papers 2756, National Bureau of Economic Research, Inc.
  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. Robert Feenstra, 2004. "Estimating The Effects Of Trade Policy," Working Papers 9510, University of California, Davis, Department of Economics.
  11. 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.
  12. 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, June.
  13. 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.
  14. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
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