Gains from trade liberalization with imperfectly competitive world markets. A note

Giovanni Anania
DOI: https://doi.org/10.7201/earn.2003.06.01

Abstract

The paper shows how analyses assuming perfect competition can yield a distorted estimation of the expected effects of a trade liberalization when market imperfections exist. The analytical framework adopted is very simple and three extreme imperfect market structures are considered. In the first case, the exporting country maximizes its producer and consumer surplus by intervening in the world market. The second market imperfection considered is the existence of a private firm playing the role of «pure middleman» in the world market. Then the case of a producer-owned marketing board which is granted exclusive export authority is addressed. It is shown that estimates of the impact of a tariff reduction in terms of prices and volume traded obtained assuming perfect competition when this postulate does not hold, are distorted. When domestic demand and supply functions are assumed to be linear, the impact is overestimated; a ranking of the size of such distortions in the three cases analyzed is provided. When no restriction is imposed on the demand and supply functions, the error in the estimated impact of a tariff reduction involves the magnitude as well as the sign of the expected changes in prices and volume traded. Finally, it is proved that when a private firm exerts monopoly and monopsony power in the world market, both the importing and the exporting countries may well be better off if, rather than making a move towards trade liberalization, the importing country «compensates» the exporting country by means of a direct transfer.


Keywords

Trade liberalization; imperfect markets; monopoly; monopsony; marketing board

Subject classification

F12; F13; Q17; Q18.

Full Text:

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References

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