Abstract
Abstract In the previous chapters, models have been discussed that are based on the assumption of perfect competition in all goods and factor markets. This assumption simplifies the analysis considerably and in many cases it is also a satisfactory approximation to real markets. However, not all markets are ap proximately competitive and this limits the applicability of perfect-competition models. For example, traditional models fail to explain the large share of intra industry trade, i.e. trade in similar commodities between similar countries. Moreover, some of the policy implications derived from these models depend decisively on the assumption of price-taking behavior and zero profits. In the late 1970s and early 1980s, a ‘ new’ trade theory was established and one started to use the tools of modern industrial economics to look at non-competitive market structures. In the meantime, this approach has been incorporated into the main body of modern international trade theory.
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