Trade Elasticities: The Significance of Trade Barriers, Multinationals and Market Structure

The elasticity of price transmission measures the extent to which a change in world prices will be transmitted to an importing country, with an elasticity of less than one being attributed to trade barriers. Recent research highlights the role that multinational trading companies may play in impeding price transmission. Further, in markets characterised by monopolistic competition an estimate of the partial elasticity of demand may be of limited practical value if no account is taken of the reaction of competitors. In this paper the potential for market structure to affect price transmission and trade elasticities is demonstrated. The elasticity of price transmission has been central to a revised approach to estimation of trade elasticities and has been used to measure the impact of endogenous trade policy. The presumption that only government intervention can impact upon price transmission is challenged with examples demonstrating why theory would suggest otherwise. While we review some recent evidence of imperfect markets, a full assessment of the empirical significance is left to future research. The paper is part of on-going research into the impact of multinationals on Australia’s trade performance and is intended to motivate further research into the impact of imperfect competition on trade elasticities. The ultimate goal is to provide policymakers with more reliable estimates of trade elasticities