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Technological Capabilities and Collusion INDUSTRIAL DEVELOPMENT AND INTERNATIONAL TRADE: TECHNOLOGICAL CAPABILITIES AND COLLUSION Leopoldo Jose Yanes Thesis submitted for the degree of Ph.D. in Economics London School of Economics September 2005 UMI Number: U61564B All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U615643 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 77 H tE |. ' /■ •'■-lyn-f 1 I / i ! British Ubm.yof ' lr«»l \ j and Economic S..*nce / C7 ° \ 5 d7 A bstract This thesis presents a theoretical analysis of industrialization. Two kinds of models are developed. The first type incorporates the following features: 1 ) Oligopolistic behaviour and strategic interaction. 2) Endogenous technological capability and market structure. 3) A general equilibrium framework. 4) A dualistic structure (characteristic of many developing countries). 5) Asymmetries in initial conditions. In part I, chapter 2 develops the benchmark model in autarky. Chapter 3 opens the econ­ omy. Under symmetry, trade is welfare improving. Asymmetric initial conditions imply that a backward nation may not benefit from trade with an advanced country, while the advanced nation will always benefit from trade with the backward nation. Subsidizing technological capability allows the backward economy to catch-up with the advanced economy’s wage. The subsidy is welfare improving if funded with a lump-sum tax. In part II we extend the models from part I to variable intensity of competition. Chapter 4 does this for autarky, chapter 5 for the open economy. We encompass intensities of competition ranging from individual to joint profit maximization. In the open economy, intensities of competition lower than individual profit maximization generate a separating surface for the wage rate. Below the surface, trade yields a higher wage rate than autarky (the reverse holds above the surface). The separating surface provides a positive basis for differential trade policy between industries. The second type of model (chapter 6 ) is a Big-Push framework with multiple equilibria, and industrialization refers to the transition between these. A Cournot (upstream) industry fea­ tures endogenous technological capability and vertical linkages to a competitive (downstream) industry. The wage rate depends on whether the economy can fit through a ‘window of op­ portunity’ whilst on the transition path. One of the central results is that if the wage rate grows too steeply, the window will be missed and the economy may end up in a lower (post transition) level of development. 1 Contents 1 Introduction 9 1 Introducing Oligopolistic Interactions and Technological Capability into a General Equilibrium Framework 34 2 General Equilibrium with Oligopolistic Interactions: Autarky 35 1 Introduction ............................................................................................... 35 2 A General Equilibrium Closed Economy M odel ..................................... 37 2.1 Consumers ............................................................................................... 37 2.2 Industry X ............................................................................................... 38 2.2.1 Stage 3; Cournot C om petition ......................................................... 38 2.2.2 Stage 2: Competition in Technological Capability ........................... 39 2.2.3 Stage 1: The Entry D ecisio n ............................................................ 40 2.3 The Labour Market and Industry Y ..................................................... 41 3 Characterization of a Symmetric General Equilibrium ........................ 42 An Explanatory Note on Welfare Analysis ................................................. 46 4 Analysis of the Symmetric Equilibrium ................................................. 46 Notation ........................................................................................................... 47 4.1 Analysis of Changes in f3 ....................................................................... 48 4.2 Analysis of Changes in a ....................................................................... 51 4.3 Analysis of Changes in e ....................................................................... 55 4.4 Analysis of Changes in uQ ....................................................................... 57 4.5 Analysis of Changes in L ....................................................................... 59 5 Remarks Concerning General Features of the M o d e l ............................ 64 6 Concluding Rem arks ................................................................................... 6 6 2 Appendix 1 : Solving the Final Stage Subgame for Industry X (Cournot Competition) ................................................................................... 69 Appendix 2 : Second order conditions for the Second Stage Subgame . 70 Appendix 3: Value A dded ............................................................................. 70 Appendix 4: Analysis of Other Variables of Interest .............................. 72 3 General Equilibrium with Oligopolistic Interactions: Open Economy 77 1 Introduction ............................................................................................... 77 2 The Open Economy General Equilibrium Model .................. 80 2.1 Consumers ............................................................................................... 80 2.2 Industry X ............................................................................................... 83 2.2.1 Stage 3: Cournot Competition .......................................................... 83 2.2.2 Stage 2: Competition in Technological Capability ............................ 84 2.2.3 Stage 1: The Entry D ecisio n ............................................................. 8 6 2.3 The Labour Market, Industry Y and the Trade Balance .................... 87 3 Characterization of a Symmetric General Equilibrium ........................ 89 A Note on W elfare ......................................................................................... 93 4 Analysis of the Symmetric Equilibrium ................................................. 94 4.1 Analysis of Changes in/? ....................................................................... 95 4.2 Analysis of Changes in a ....................................................................... 97 4.3 Analysis of Changes in £ .......................................................................... 98 4.4 Analysis of Changes in uQ ....................................................................... 99 4.5 Analysis of Changes in L ....................................................................... 99 5 The Impact of Asymmetric Initial Conditions and the Welfare Conse­ quences of Catching-Up .................................................................... 100 5.1 Asymmetric Initial Conditions ................................................................. 101 5.2 Industrial Policy and Catching-U p ...........................................................107 6 Conclusions ...................................................................................................... 109 Appendix 1 : Solving the Final Stage Subgame for Industry X ....................I ll Appendix 2: Second order conditions for the Second Stage Subgame . 113 Appendix 3: Value Added and the Trade Balance ........................................ 113 Appendix 4: Proof of Proposition 2 .................................................................. 115 3 II Introducing Collusion into a General Equilibrium Framework with Oligopolistic Interactions 118 4 Collusion in General Equilibrium with Oligopolistic Interactions: Autarky 119 1 Introduction .................................................................................................. 119 2 Closed Economy General Equilibrium Model with Profit Sharing . 120 Industry X .........................................................................................................120 2.1 Stage 3: Quantity Competition with Profit Sharing ...............................121 2.2 Stage 2: Competition in Technological Capability with Profit Sharing 123 2.3 Stage 1: The Entry Decision with Profit S h arin g ..................................125 3 Characterization of a Symmetric General E quilibrium ............................126 4 Analysis of the Symmetric Equilibrium .....................................................129 4.1 Analysis of Changes in 7 ..........................................................................130 4.2 Analysis of Changes in a ..........................................................................138 5 Remarks Concerning General Features of the Extended Model .... 144 6 Conclusions .................. 145 Appendix 1 : Solving the Final Stage Subgame for Industry X ...................147 Appendix 2: Second order conditions for the Second Stage Subgame . 148 Appendix 3: Analysis of Other Variables of Interest ..................................149
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