A Simple Model of Competition Policies, Trade, and the Skill Premium

Abstract

How competition policies interact with international trade has been one of the so-called new issues in the WTO. We develop a simple, general equilibrium model to examine the possible interaction between domestic competition policies and trade. In the model, cartels are allowed in that a certain set of firms collude in decision-making, and efficiency gains from a cartel exist in that the fixed costs are shared within a cartel. Then we first show, in a closed economy model, that entry deregulation that reduces the fixed costs of entry can increase the skill premium by increasing the number of firms and decreasing firm size, while an antitrust policy that reduces the size of cartels can decrease the skill premium by decreasing the number of firms and increasing firm size. We next extend the model to a two-country model. In the case of asymmetric countries, though the effects are not clear, our numerical examples show a possibility that entry deregulation and antitrust policy in one country, respectively, can increase and decrease the skill premia in both countries through trade; however, the domestic skill premium is changed by a greater percentage than the foreign one. Finally, available U.S. data show that our model does appear to be empirically relevant.