Scale Economies and Imperfect Competition in WorldScan

Roland de Bruijn

No 140, CPB Memorandum from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: WorldScan, the CGE model for international policy analysis and long-term scenario studies, is applied regularly at the CPB. The production technology in the model is that of constant returns to scale and the market structure is characterized by perfect competition. However, it is a well known fact that many sectors such as manufacturing and service sectors feature increasing returns and firms compete imperfectly. To give the model more realism, it is therefore necessary to expand the model. Besides that, several research projects require an identification of scale economies in order to perform a sound welfare analysis. In this memorandum, I review the literature on scale economies and imperfect competition and analyze which approach is most suitable to implement in WorldScan. For the objectives at hand it appears most efficient to expand the model with an extended Dixit-Stiglitz approach. Simulations with an aggregated version of WorldScan show that the effects of incorporating scale economies are significant. Evidently, in a liberalisation scenario, sectors with increasing returns can exploit their technology more than sectors with constant returns, implying considerable increases in production and exports for these sectors. Concluding, this expansion of the model allows for an identification of formerly unidentified welfare effects. Download PDF-bestand (564Kbytes)

JEL-codes: D43 D58 F12 L13 (search for similar items in EconPapers)
Date: 2006-02
New Economics Papers: this item is included in nep-com, nep-int and nep-mic
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Citations: View citations in EconPapers (8)

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