DP7600 Two and a Half Theories of Trade

Author(s):	J Peter Neary
Publication Date:	December 2009
Keyword(s):	GOLE (General Oligopolistic Equilibrium), granularity, heterogeneous firms, international trade and market structure
JEL(s):	F10, F12
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=7600

This paper discusses the place of oligopoly in international trade theory, and argues that it is unsatisfactory to ignore firms altogether, as in perfectly competitive models, or to view large firms as more productive clones of small ones, as in monopolistically competitive models. Doing either fails to account for the "granularity" in the size distribution of firms and for the dominance of large firms in exporting. The paper outlines three ways of developing more convincing models of oligopoly, which allow for free entry but do not lose sight of the grains in "granularity": heterogeneous industries, natural oligopoly, and superstar firms.