Product Differentiation, Decreasing Costs, and Intra-sectoral Trade

Karl Farmer and Matthias Schelnast ()
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Matthias Schelnast: University of Graz

Chapter 11 in Growth and International Trade, 2013, pp 235-257 from Springer

Abstract: Abstract This chapter leaves (neo-) classical trade theory in order to be able to address the astonishing phenomenon of enormous international trade among similarly developed industrialized countries. The traditional assumptions of perfect competition in all markets, of trade with standardized homogeneous goods and of constant returns to scale are replaced by monopolistic competition in output markets, product differentiation and decreasing average production costs. This change in the market and cost structure enables us to address intra-industry (intra-sectoral) trade among highly developed countries. In formalizing Linder’s (An essay on trade and transformation. New York: Wiley, 1961) pioneering work on a demand-oriented trade theory in line with the already classic Dixit-Stiglitz (American Economic Review, 67, 297–308, 1977) approach, we present a full-fledged monopolistic equilibrium solution with a 100 % of intra-sectoral trade.

Keywords: Free Trade; Price Elasticity; Average Cost; Market Equilibrium; Trade Theory (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/978-3-642-33669-0_11

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