An entry model of international trade
Abstract
The literature of international trade in imperfect market with Cournot assumptions can have two problems: (1) the postentry quantity projected by Nash equilibrium may or may not be supported by firm's capacity level that has been fixed in autarky; and (2) since Nash equilibrium output is independent of fixed factors employed, the payoff level for the entry firm must not be always positive. Thus, the trade pattern projected by such model may actually proceed in different directions. This paper has restructured the above model, and examined the entry effect on the trade. In a simple two-by-two trade setting, if all manufacturing firms in world have discontinuous cost functions in entry, and world market follows the standard Cournot duopoly, then, there must exist a link between the entry of firms and the postentry equilibrium in world; and the interaction between the internal firm's cost shift and the external market structural change should be critical to the determination of trade. Among other interesting outcomes, the essential result from this approach is that, as two entry firms have symmetrical behavior, the solution for their entry game should naturally imply a constant level of relative capacity for each firm, which may or may not be equal to each established capacity. Given this endogenous value, essentially, all the entry and investment decisions of firms are only dependent on the relationship between autarky and endogenous capacity levels. Since trade in postentry equilibrium has been qualitatively determined, while firms make entry and investment decisions, they also influence the world trade and welfare. With different capacity constraints, the results can explain the trade either between similar countries or between dissimilar countries, and the conclusion is mainly affected by autarky production conditions in each country upon entry. In real world, this seems plausible for various types of trade, such as the ones involving Western industrialized nations, or that happened to ex-Soviet area, etc. The recent imperfect market study is just a special case of these findings.
Subject Area
Business costs|Business education|Business community
Recommended Citation
Wang, Hu-Sheng, "An entry model of international trade" (1993). Dissertations available from ProQuest. AAI9321495.
https://repository.upenn.edu/dissertations/AAI9321495