A Note on Optimum Policy Choice under Imperfect Domestic Market Conditions and Differentiated International Goods

Authors

  • Pablo Serra Departamento de Ingeniería Industrial, Universidad de Chile, Santiago, Chile image/svg+xml

Keywords:

optimal policy, imperfect competition, differentiated goods, trade policy, antitrust policy, small open economy

Abstract

This note derives the optimal industrial and trade policy for a two-good, one-factor small economy. The first good is an homogeneous commodity. For the second good we assume that the domestic and the foreign versions are imperfect substitutes. We also assume that the country is a price taker in international markets except for the fact that it faces a downward sloping export demand for the differentiated good. Within this framework we first show the existence of welfare-improving active commercial policies, and then we prove that the optimal intervention is an antitrust policy. These results imply that (i) once the appropiate policy intervention is enacted free trade becomes optimal, and (ii) free trade does not eliminate the need for antitrust regulation.

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References

Armington, P. (1969). A theory of demand for products distinguished by place of production. IMF Staff Papers, 16(1), 159–178. https://doi.org/10.2307/3866403

De Melo, J. (1988). Computable general equilibrium models for trade policy analysis in developing countries: A survey. The World Bank.

Eaton, J., & Grossman, G. (1986). Optimal trade and industrial policy under oligopoly. Quarterly Journal of Economics, 101(2), 383–406. https://doi.org/10.2307/1891121

Flam, M., & Helpman, E. (1987). Industrial policy under monopolistic competition. Journal of International Economics, 22(1-2), 79–102. https://doi.org/10.1016/0022-1996(87)90023-7

Krugman, P. (1984). Import protection as export promotion. In H. Kierzkowski (Ed.), Monopolistic competition and international trade. Oxford University Press.

Linder, S. B. (1961). An essay on trade and transformation. John Wiley.

Rodrik, D. (1987). Policy targeting with endogenous distortions: Theory of optimum subsidy revisited. Quarterly Journal of Economics, 102(4), 903–911.

Rodrik, D. (1988). Imperfect competition, scale economies, and trade policy in developing countries. In R. E. Baldwin (Ed.), Trade policy issues and empirical analysis. University of Chicago Press.

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Published

1990-04-30

How to Cite

Serra, P. (1990). A Note on Optimum Policy Choice under Imperfect Domestic Market Conditions and Differentiated International Goods. Economic Analysis Review, 5(1), 61–67. Retrieved from https://www.rae-ear.org/index.php/rae/article/view/251

Issue

Vol. 5 No. 1 (1990)

Section

Articles

License

Copyright (c) 1990 Pablo Serra

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

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