Chapter 20 Industrial organization and international trade

Abstract

The monopolistic competition model of trade began with an empirical observation. The most influential of trade models is the Heckscher–Ohlin–Samuelson model, which tells that trade reflects an interaction between the characteristics of countries and the characteristics of the production technology of different goods. Specifically, countries will export goods whose production is intensive in the factors with which they are abundantly endowed—for example, countries with a high capital–labor ratio will export capital–intensive goods. The monopolistic competition model has had a major impact on research into international trade. By showing that increasing returns and imperfect competition can make a fundamental difference to the way people think about trade, this approach has been crucial in making work that applies industrial organization (IO) concepts to trade respectable. In effect, the monopolistic competition model has been the thin end of the IO/trade wedge.