DP120 | Trade Policy with Increasing Returns and Imperfect Competition: Contradictory Results from Competing Assumptions

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A number of recent papers reach different conclusions concerning the effects of trade and industrial policy on imperfectly competitive industries; the implications for policy are therefore sensitive to assumptions concerning both firm behaviour and market structure. This paper sets out a single model within which policy can be examined under a variety of assumptions concerning market structures. The results obtained from this model can be compared to results already obtained in the literature, and the model allows further analysis of some interesting cases. We consider the four types of market structure generated by oligopoly versus free entry, and segmented markets versus integrated markets. By employing simple functional forms we are able to make direct comparisons between these cases. We conclude that the effects of trade and industrial policies are greater when markets are segmented than when they are integrated, and that, if transport costs are small, policy is more potent when the number of firms is fixed than when there is free entry.