Intertemporal models of international trade in imperfectly competitive markets

Jiann-Chyuan Wang, Purdue University

Abstract

There is a growing belief that international competition among firms in many industries is imperfectly competitive because the number of firms is few, or the products are differentiated, or the governments themselves have cartelized the national firms engaged in competition. Firms in an industry have monopoly power and may earn positive profits in an imperfectly competitive market. Under such circumstances, national governments, particularly in developed countries, have engaged in import quota to protect their domestic markets. Meanwhile, recent observations of wide fluctuations in exchange rates have drawn the attention of economic research from a variety of perspectives. One perspective concerns the effect of exchange rate fluctuations on the price and output decisions of oligopolistic firms in an international industry. This dissertation employs an intertemporal model in which a firm's action at one point in time has effects which will spill over into future periods. In this intertemporal setting, a theoretical analysis of relationships among exchange rate movements, import quota, and the equilibrium behavior in an international market is provided. The model incorporates a "learning-by-doing" effect into an oligopolistic international trade framework to examine how domestic and foreign firms respond to exchange rate fluctuations and quota. The basic analysis is applied to a "symmetric" case, in which both countries have the same technology and demand conditions. The effect of learning-by-doing is to give both firms in an international duopoly an incentive to expand outputs beyond a static Cournot level. We then extend the analysis to an "asymmetric" case in which one country's industry is "mature" and the other country's is "less developed." In addition, we are also concerned with the pass-through effect of exchange rate fluctuations. From the empirical study, it is shown that exchange rate pass-through level varies across industries. In some industries, learning-by-doing gives firms an extra incentive to expand their output without passing the exchange rate loss completely onto the foreign consumers. This results in an incomplete pass-through.

Degree

Ph.D.

Advisors

Weinberg, Purdue University.

Subject Area

Economics

COinS