General oligopolistic equilibrium, trade liberalization and competition policy

University of Minnesota Ph.D. dissertation. September 2012. Major: Applied Economics. Advisor: Robert Kudrle. 1 computer file (PDF); ix, 87 pages, appendices A-C.This thesis investigates the relationship between trade liberalization and competition level. The conventional wisdom tells us that with the removal or reduction of trade barriers, domestic firms will face more competition from outside and their market power will decrease. However, empirical evidence does not always support this argument. In chapter 2, based on Roeger (1995) and using U.S. manufacturing industries data from 1958 to 1996, I show that trade liberalization does not always decrease price cost margin, which is an indicator of competition level, for all 4-digit US manufacturing industries. Around one third 4-digit manufacturing industries in US have increasing price cost margins after trade liberalization. Unlike traditional studies on competition level from partial equilibrium models, in chapter 3, this thesis builds a general oligopolistic equilibrium model with heterogeneous sectors, homogeneous firms and free entry based on Neary (2009) to explain why trade liberalization does not always bring more competition. In the model, a decrease in competition level shifts income from factor owners to recipients of profits, reallocates factors from low cost sectors to high cost sectors and decreases countries' welfare. In an open economy with trade liberalization, the previous ndings in a closed economy will give countries incentives to adopt beggar-thy-neighbor competition policies, which decrease competition level in order to maximize its own welfare while sacricing its trade partner's welfare. In an extreme case, both countries engaged in trade have incentives to decrease competition level and create a Prisoner's Dilemma. The above results also extend Neary (2003)'s analysis about competitive advantage and show that competition could be a disadvantage. In the end, this thesis further brings heterogeneous firms into the model in chapter 4. Following firms' entry and exit strategy from Hopenhayn (1992), I show that previous ndings are still valid under certain conditions when firms are heterogeneous. Two general policy recommendations stand out from this thesis.First, lowering competition level may bring trade advantage and improves welfare for a country during trade liberalization; Second, an international agreement on competition policy could possibly increase both world welfare and trade