Abstract
This paper considers a model with one primary factor, one intermediate good, and two final goods. Increasing returns to scale are introduced into the production of the intermediate good to analyze trade patterns and gains from trade with two assumptions about the market structure of the intermediate good: average cost pricing and monopoly. Free trade does not necessarily lead to gains for the economy and either specialization or multiple equilibria are obtained. This paper also provides interesting comparisons between the types of market structure, showing, for example, that monopoly can be preferred to average cost pricing.
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