Competitive Advantages

1
Competitive Advantages

• New Trade Theories

2
Neo Classical Theory

• Reigned supreme until 1980s very powerful tool
  leads to a great number of clear-cut and
  unambiguous conclusions
• Conclusions and actual developments?
• Assumptions of H-O?
• Friedman exactness of predictions not realism
  of assumptions
• H-O weak explanatory power gt may need to look
  at assumptions on which it is based

3
New Trade Theories 1980s

• Inspired by industrial economists
• Imperfect competition
• Economies of scale
• Product differentiation
• Shift away from perfect competition
• Focus on similarities between nations
• Interest level is the firm and not the industry

4
Competitive Advantages

• Gives the firm an advantage over competition from
  abroad
• Competitive Advantage historical development of
  the firm process development marketing strategy
  etc
• Cannot assume perfect competition

5
Economies of Scale

• Average cost (ie cost per unit) of output falls
  as output level increases see table on the next
  slide
• How would this lead to international trade?
• Take the UK US each product 10 units gt
  labour input 15 units each
• Concentration in US gt 30 hrs gt 25 units
• World economy- more output given inputs
• Concentration in a narrower range of goods
• Demand for variety satisfied through trade

6
Economies of Scale
7
Economies of Scale

• External EOS when the industry grows gt costs
  fall no change in the number of firms perfect
  competition can still hold
• Internal EOS when the cost per unit depends on
  the size of the firm number of firms falls gt PC
  cannot hold
• Monopolistic competition and Oligopoly

8
Monopolistic Competition

• Product differentiation and consumer loyalty
• Real world car industry
• Underlying the application of MC to international
  trade is the idea that trade increases the size
  of the market trade loosens constraints on
  variety and production scale imposed on firms by
  the size of the market
• Trade can lead to mutual gains for the countries
  involved even when they are similar

9
External Economies of Scale

• As the industry as a whole grows in terms of
  increased production, individual firms see their
  per unit costs fall even though they remain small
• Joint localisation
• Geographical concentration
• Knowledge spillovers
• Implications for trade?

10
Key Contributors

• Brander Krugman
• Lancaster
• Dixit Stiglitz
• Linder
• Falvey
• Porter