Oligopsony Distortions and Welfare Implications of Trade*

Stephen Devadoss and Wongun Song

Review of International Economics, 2006, vol. 14, issue 3, 452-465

Abstract: While imperfect competition in the output market has garnered extensive focus in the new trade theory literature, input market imperfection has received considerably less attention. Since market power in input purchase has been growing in recent years, it is worth examining the welfare implications of trade arising from oligopsony power. We develop a model consisting of two final goods, one intermediate good, and two primary factors (capital and labor). One final good and the intermediate good employ primary factors, whereas the other final good uses labor and the intermediate input. All markets operate under perfect competition except for the intermediate input, which is oligopsonistic. Using this model, we show that oligopsony can lead to some anomalies such as an increase in the oligopsony output, reward to the intensive‐factor in the oligopsony sector, national welfare, and deterioration of terms of trade, but it always decreases the reward to the intermediate input.

Date: 2006
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