Abstract
This paper presents a new model of oligopoly in general equilibrium and explores its implications for positive and normative aspects of international trade. Assuming “continuum-Pollak” preferences, the model allows for consistent aggregation over a continuum of sectors, in each of which a small number of home and foreign firms engage in Cournot competition. I show how competitive advantage interacts with comparative advantage to determine resource allocation, and, specializing to continuum-quadratic preferences, I explore the model’s implications for the gains from trade, for the distribution of income between wages and profits, and for production and trade patterns in a two-country world.
Highlights
International markets are typically characterized by firms that are relatively large in the markets in which they compete
General-equilibrium models of monopolistic competition have been applied to mostly positive questions of trade and location; on the other hand, partial-equilibrium models of oligopoly have been applied to mostly normative questions of “strategic” policy choice
This paper has developed a tractable but consistent model of oligopoly in general equilibrium; and used it to take a small step towards completing the “new trade theory” agenda of integrating international trade with industrial organization
Summary
International markets are typically characterized by firms that are relatively large in the markets in which they compete. Models by contrast put large firms at center stage and allow for a wide range of sophisticated strategic interactions between them Since they typically ignore general-equilibrium interactions between markets, and especially between goods and factor markets, they cannot deal with many of the classic questions of international trade theory.. This paper aims to advance the unfinished part of the new trade theory revolution, by developing a framework that should have applications in other fields: a tractable but consistent model of oligopoly in general equilibrium. Previous attempts at this goal have encountered one of a number of related problems..
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