Market Imperfection and Trade Policy

Abstract

Abstract This chapter discusses trade policies with imperfectly competitive domestic firms. When the import competing good is produced by a domestic monopoly—a single domestic firm that is small though in the world market—protectionist trade policies by themselves may determine the extent to which such a firm may exert its monopoly power in the domestic market. The nature of trade policy is also an important factor here. For example, the single firm exerts its full monopoly power under an import quota, but turns out to be a price-taker under an import tariff. Alternatively put, an import tariff breaks up the monopoly and thereby generates a higher welfare by its pro-competitive effect than an import quota. A very high tariff or an import quota, however, may allow a domestic monopoly to sell goods in the world market at a much cheaper price than the price at which it sells in the domestic market. This is known as the dumping. On the other hand, when the domestic firm of a country is a large conglomerate and its market power is not confined just to the domestic market, it adds an altogether different dimension to the trade policies. The trade policies can in such cases be used by the national governments to influence the international market share rivalry between its own large monopoly and other countries’ large monopoly firms. This strategic trade policy in the context of international market-share rivalry is also discussed in this chapter.