R&D, Market Structure and Trade: A General Equilibrium Analysis

Leo Yanes

No 361, Discussion Papers Series from University of Queensland, School of Economics

Abstract: That many industries exhibit highly concentrated market structures, even at the global level, calls for trade theoretic analyses which can accommodate this fact. We present a two-country, general equilibrium analysis in which high concentration levels can be sustained through the interaction between R&D and market structure, whilst emphasizing the effects of trade and industrial policy on wages and welfare. The world economy is characterized by asymmetric initial conditions and populations. If initial conditions are very different, freetrade reduces wages in a backward economy, relative to autarky. However, the advanced economy always achieves higher wages through trade. Welfare gains from trade arise when economies are either very similar or very different. In the intermediate case, when initial conditions are not too different, and the advanced economy's population is not very large, the backward economy loses from trade, while the advanced economy gains. A compensation mechanism is feasible and would ensure that no nation loses from trade. The analysis provides formal criteria for the choice of trade partners and the formation of trade blocs. Moreover, industrial policy (an R&D subsidy) is shown to be neutral or ineffective, in the sense that it does not affect any real magnitudes.

Keywords: International trade; industrial policy; product quality; R&D; market structure; initial conditions (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-ino, nep-int, nep-mic and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:361

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