DOCSLIB.ORG

Information to Users

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Information to Users INFORMATION TO USERS This manuscript has been reproduced from themicrofilm master. U M I films the text directly from the original or copy submitted. Thus, some thesis and dissertation copies are in ^ewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photogr^hs, print bleedthrough, substandardmargins, and improper alignment can adversefy affect reproduction. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand comer and continuing from left to right in equal sections with small overlaps. Each original is also photographed in one exposure and is included in reduced form at the back of the book. Photographs included in the original manuscript have been reproduced xerographically in this copy. Higher quality 6" x 9" black and white photographic prints are available foraxsy photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. UMI A Bell & Howell Information C o m pany 300 North Zeeb Road. Ann Arbor.Ml 48106-1346 USA 313,'761-4700 800/521-0600 Order Number 9516982 A linear-quadratic dynamic game approach to estimating market power in the banana export market Deodhar, Satish Y., Ph.D. The Ohio State University, 1994 Copyright ©1994 by Deodhar, Satish Y. All rights reserved. UMI 300 N. Zeeb Rd. Ann Arbor, MI 48106 A LINEAR-QUADRATIC DYNAMIC GAME APPROACH TO ESTIMATING MARKET POWER IN THE BANANA EXPORT MARKET DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Satish Y. Deodhar, M.A. ***** The Ohio State University 1994 Dissertation Committee: Approved By Prof. Ian Sheldon Prof. Dennis Henderson Prof. Mario Miranda iviser Department of Agricultural Prof. Stanley Thompson Economics and Rural Sociology Copyright by Satish Y. Deodhar 1994 flïï I 3?4^lltM - =h1(cy^ { ^ ^ o ^ o 3 ® ) "Economics is the most important", says Kautilya. For, both the spiritual good and material well-being depend on it. Arthaéàstra - Kautilya (circa 320 B.C.) TO MY PARENTS 1 1 ACKNOWLEDGEMENTS I would like to express my sincere appreciation and gratitude to Prof. Ian Sheldon for his constant encouragement and guidance. As my "Guru", he has served in many roles, as a mentor, teacher, guide and a counselor. Gratitude is also owed to Prof. Mario Miranda and Prof. Dennis Henderson for their useful suggestions and insights. I am specially thankful to Prof. Perloff of the University of California, Berkeley, some of whose original computer programs have been used in this study. Thanks go to all the members of my supporting cast. Suggestions of Prof. Jones for the static model, Peter Voros's help in mainframe computing, and Jim Dayton's frequent help in my imperfect word-processing is acknowledged. Credit must also go to fellow graduate students, who from time to time provided valuable information, and offered suggestions. Finally, I wish to thank my family, who had to endure the best and the worst in me. My parents, sister and brother-in- law were a source of constant support throughout my graduate program. To my lovely wife, Deepali, I offer sincere thanks for her unshakable faith in me, and her willingness to share with me the vicissitudes of my research endeavor. iii VITA 1985 ................. B.A. (Econ), Gokhalé Institute of Politics and Economics, Puné, India. 1986-88 ............. Sub-Broker, Momsha Financial Consultancy Services, Puné, India. 1989 ................. M.A., Dept, of Economics, The Ohio State University, Columbus, OH. 1988-92 ............. Graduate Teaching Associate, Dept. of Economics, The Ohio State University, Columbus, OH. 1992-94 ............. Graduate Research Associate, Dept. of Agricultural Economics, The Ohio State University, Columbus, OH. PUBLICATIONS Deodhar, S. and Sheldon, I. (1994) "Is Foreign Trade (Im)Perfectly Competitive?: An Analysis of the German Market for Banana Imports," Working Paper # ESO - 2154, The Ohio State University, Columbus: OH. Deodhar, S. and Sheldon, I. (1994) "Estimation of Dynamic Oligopolistic Interaction: The Case of the Banana Export Market," Paper accepted for the Southern Economic Association Conference, November 1994, Orlando: FL. FIELDS OF STUDY Major Field: Agricultural Economics and Rural Sociology _Studies in International Agricultural Trade Minor Fields: Macroeconomics, Labor Economics IV TABLE OF CONTENTS DEDICATION ...................... il ACKNOWLEDGEMENTS ...................................... ill VITA ................................................... iv LIST OF TABLES ......................................... vii LIST OF FIGURES ......................................... viii CHAPTER PAGE I. INTRODUCTION ................................ 1 1.1. Traditional Trade Theories .............. 1 1.2. The New Trade Theories ................. 3 1.3. Estimation of Market Power Using Dynamic Games .................... 5 1.4. Plan of Dissertation .................. 7 II. SYNTHESIS OF INDUSTRIAL ORGANIZATION AND INTERNATIONAL TRADE .................... 10 2.1. Origin of the NTTs .................... 10 2.2. Domestic Markets and Foreign Competition 13 2.3. Intra-Industry Trade .................. 19 2.4. Trade Policy Issues ................... 32 2.5. The Litmus Test ........................ 39 III. STATIC MODELS OF MARKET POWER ESTIMATION .... 41 3.1. Traditional Approach .................. 41 3.2. Modern Approach ....................... 45 3.3. Summing Up ............................. 62 IV. DYNAMIC MODELS OF MARKET POWER ESTIMATION ... 65 4.1. Conjectural Variations Approach ........ 65 4.2. Game Theory and Oligopoly ............. 72 4.3. Dyneunic Games Approach................. 86 4.4. Retrospection......................... 100 V. THE BANANA EXPORT MARKET ............ 103 5.1. Historical Background .................. 103 5.2. Structure of the Banana Industry ...... 106 5.3. Motivation for the S t u d y ............... 108 5.4. Methodology ............................ 112 VI. EMPIRICAL PROCEDURE ......................... 115 6.1. Data Description and Sources .......... 115 6.2. The Static Model ....................... 117 6.3. The Dynamic Model ...................... 125 VII. CONCLUDING DISCUSSION ....................... 142 7.1. Inference and Policy Implications ..... 142 7.2. Limitations and Future Direction ...... 149 APPENDICES A. Data .................................... 152 B. Restrictions Obtained From the Open-Loop First Order Condition ....... 154 C. Restrictions Obtained From the Feedback First Order Condition ........ 158 D. Solving the Restrictions to Obtain Values of V and Ô ...................... 161 E. Glossary ............................... 163 BIBLIOGRAPHY ...................................... 165 VI LIST OF TABLES TABLE PAGE 3.1. Estimates of Lerner's index (L) .............. 63 6.1. Description of Variables ..................... 118 6.2. Estimation of the Static Model ............... 121 6.3. Bootstrapping of the Static Model ............ 123 6.4. Banana Export Adjustment (Markov) Equation ... 131 6.5. Classical Estimates of Dynamic Model.......... 133 6.6. Bootstrapping Dynamic Model .................. 135 6.7. The Distribution of V ........................ 136 6.8. Hypothesis Testing for Bootstrapped V & Ô .... 141 V l l LIST OF FIGURES FIGURES PAGE 2.1. Import competition and domestic pricing... .. 15 2.2. Competitive export market and domestic pricing 17 2.3. Intra-industry trade ........................ 24 2.4. Production Pattern of a MNC at home and abroad 29 2.5. VERs and the resultant Nash & mixed strategy equilibria .................................. 38 3.1. Parallel shift of the demand c u r v e .... 50 3.2. Rotation of the demand curve ................ 52 4.1. Cournot-Nash and Collusive payoffs .......... 77 4.2. Closed-loop and open-loop strategies ........ 84 4.3. Static and dynamic reaction functions ....... 92 6.1. Distribution of X ............................ 124 6.2. Flowchart of the dynamic model .............. 126 6.3 Distribution of Vs .......................... 138 6.4. Distribution of 6s .......................... 139 6.5. Convergence of and Vf ..................... 140 viix CHAPTER I INTRODUCTION 1.1 Traditional Trade Theories The notion that societies benefit from exchange of goods and services is a very old one. Smith (1776) wrote in The Wealth of Nations, that the division of labor which reduces unit cost of production, is a consequence of a certain propensity in human nature; the propensity to truck, barter and exchange one thing for another. He advocated the concept of absolute advantage which meant that a country will specialize in the production and export of those goods in which it incurs lower opportunity cost compared to the other country. Four decades later, Ricardo (1817) expanded his idea and proposed a theory that explained the reason for and pattern of trade between any two nations. In his treatment, trade occurs due to differences in technology between two nations and each one specializes in the production and export of good that it produces at lower opportunity cost under autarky. His important contention was that,
Load more

Recommended publications
  • Economics of Competition in the U.S. Livestock Industry Clement E. Ward
    Economics of Competition in the U.S. Livestock Industry Clement E. Ward, Professor Emeritus Department of Agricultural Economics Oklahoma State University January 2010 Paper Background and Objectives Questions of market structure changes, their causes, and impacts for pricing and competition have been focus areas for the author over his entire 35-year career (1974-2009). Pricing and competition are highly emotional issues to many and focusing on factual, objective economic analyses is critical. This paper is the author’s contribution to that effort. The objectives of this paper are to: (1) put meatpacking competition issues in historical perspective, (2) highlight market structure changes in meatpacking, (3) note some key lawsuits and court rulings that contribute to the historical perspective and regulatory environment, and (4) summarize the body of research related to concentration and competition issues. These were the same objectives I stated in a presentation made at a conference in December 2009, The Economics of Structural Change and Competition in the Food System, sponsored by the Farm Foundation and other professional agricultural economics organizations. The basis for my conference presentation and this paper is an article I published, “A Review of Causes for and Consequences of Economic Concentration in the U.S. Meatpacking Industry,” in an online journal, Current Agriculture, Food & Resource Issues in 2002, http://caes.usask.ca/cafri/search/archive/2002-ward3-1.pdf. This paper is an updated, modified version of the review article though the author cannot claim it is an exhaustive, comprehensive review of the relevant literature. Issue Background Nearly 20 years ago, the author ran across a statement which provides a perspective for the issues of concentration, consolidation, pricing, and competition in meatpacking.
    [Show full text]
  • Endogenous Market Power"
    Endogenous Market Power Marek Weretkay August 5, 2010 Abstract In this paper we develop a framework to study thin markets, in which all traders, buyers, and sellers are large, in the sense that they all have market power (also known as bilateral oligopoly). Unlike many IO models, our framework does not assume a priori that some traders have or do not have market power because “they are large or small.” Here, market power arises endogenously for each trader from market clearing and optimization by all agents. This framework allows for multiple goods and heterogeneous traders. We de…ne an equilibrium and show that such equilibrium exists in economies with smooth utility and cost functions and is determinate. The model suggests that price impact depends positively on the convexity of preferences or cost functions of the trading partners. In addition, the market power of di¤erent traders reinforces that of others. We also characterize an equilibrium outcome: Compared to the competitive model, the volume of trade is reduced and hence is Pareto ine¢ cient. JEL classification: D43, D52, L13, L14 Keywords: Thin Markets, Bilateral Oligopoly, Walrasian Auction The problem of the exchange of goods among rational traders is at the heart of economics. The study of this problem, originating with the work of Walras and re…ned by Fisher, Hicks, Samuelson, Arrow, and Debreu, provides a well-established methodology for analyzing market interactions in an exchange economy. The central concept of this approach is competitive equilibrium, wherein it is assumed that individual traders cannot a¤ect prices. Price taking behavior is justi…ed by the informal argument that the economy is so large that each individual trader is negligible and hence has no impact on price.
    [Show full text]
  • Analyzing Cost Efficient Production Behavior Under Economies of Scope: a Nonparametric Methodology
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Cherchye, Laurens; de Rock, Bram; Vermeulen, Frederic Working Paper Analyzing cost efficient production behavior under economies of scope: a nonparametric methodology IZA Discussion Papers, No. 2319 Provided in Cooperation with: IZA – Institute of Labor Economics Suggested Citation: Cherchye, Laurens; de Rock, Bram; Vermeulen, Frederic (2006) : Analyzing cost efficient production behavior under economies of scope: a nonparametric methodology, IZA Discussion Papers, No. 2319, Institute for the Study of Labor (IZA), Bonn This Version is available at: http://hdl.handle.net/10419/34010 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten
    [Show full text]
  • Resource Issues a Journal of the Canadian Agricultural Economics Society
    Number 3/2002/p.1-28 www.CAFRI.org Agriculture, Food ß Current & Resource Issues A Journal of the Canadian Agricultural Economics Society A Review of Causes for and Consequences of Economic Concentration in the U.S. Meatpacking Industry Clement E. Ward Professor and Extension Economist, Oklahoma State University This paper was prepared for presentation at the conference The Economics of Concentration in the Agri-Food Sector, sponsored by the Canadian Agricultural Economics Society, Toronto, Ontario, April 27-28, 2001 The Issue This squall between the packers and the producers of this country ought to have blown over forty years ago, but we still have it on our hands .... Senator John B. Kendrick of Wyoming, 1919 lear and continuing changes in the structure of the U.S. meatpacking industry have Csignificantly increased economic concentration since the mid-1970s. Concentration levels are among the highest of any industry in the United States, and well above levels generally considered to elicit non-competitive behavior and result in adverse economic performance, thereby triggering antitrust investigations and subsequent regulatory actions. Many agricultural economists and others deem this development paradoxical. While several civil antitrust lawsuits have been filed against the largest meatpacking firms, there have been no major antitrust decisions against those firms and there have been no significant federal government antitrust cases brought against the largest meatpacking firms over the period coincident with the period of major structural changes. The structural changes in the U.S. meatpacking industry raise a number of questions. What is the nature of the changes and what economic factors caused them? What evidence is ß 1 Current Agriculture, Food & Resource Issues C.
    [Show full text]
  • Scope Economies: Fixed Costs, Cgmplementarity, and Functional Form
    Working Paper Series This paper can be downloaded without charge from: http://www.richmondfed.org/publications/ Working Paper 91-3 Scope Economies: Fixed Costs, Cgmplementarity, and Functional Form Lawrence B. Pulley** and David B. Humphrey*** February, 1991 This is a preprint of an article published in the Journal of Business Ó, July 1993, v. 66, iss.3, pp. 437-62 *The opinions expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Richmond or the Federal Reserve System. The authors thank John Boschen for his comments on an earlier version of this paper. Support for Lawrence Pulley was received from the Summer Research Grant Program at the College of William and Mary. *School of Business Administration, College of William and Mary, Williamsburg, Virginia, 23187. ***FederalReserve Bank of Richmond, Richmond, Virginia, 23261. Abstract. Bank scope economies have been derived from either the standard or generalized (Box-Cox) multiproduct translog (or other logarithmic) functional form. Reported results have ranged from strong economies to diseconomies and are far from conclusive. The problem is functional form. An alternative composite form is shown to yield stable SCOPE results both at the usual point of evaluation and for points associated with quasi-specialized production (QSCOPE). Unstable results are obtained for the other forms. Scope economies are shown to exist for large U.S. banks in 1988 and to depend on the number of banking outputs specified. The scope estimates are also separated into their two sources--fixed-cost and cost-complementarity effects. Scope Economies: Fixed Costs, Complementarity, and Functional Form 1.
    [Show full text]
  • Estimating Economies of Scale and Scope with Flexible Technology
    Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Estimating Economies of Scale and Scope with Flexible Technology Thomas P. Triebs David S. Saal Pablo Arocena Subal C. Kumbhakar Ifo Working Paper No. 142 October 2012 An electronic version of the paper may be downloaded from the Ifo website www.cesifo-group.de. Ifo Working Paper No. 142 Estimating Economies of Scale and Scope with Flexible Technology Abstract Economies of scale and scope are typically modelled and estimated using cost functions that are common to all firms in an industry irrespective of whether they specialize in a single output or produce multiple outputs. We suggest an alternative flexible technology model that does not make this assumption and show how it can be estimated using standard parametric functions including the translog. The assumption of common technology is a special case of our model and is testable econometrically. Our application is for publicly owned US electric utilities. In our sample, we find evidence of economies of scale and vertical economies of scope. But the results do not support a common technology for integrated and specialized firms. In particular, our empirical results suggest that restricting the technology might result in biased estimates of economies of scale and scope. JEL Code: D24, L25, L94, C51. Keywords: Economies of scale and scope, flexible technology, electric utilities, vertical integration, translog cost function. Thomas P. Triebs David S. Saal Ifo Institute – Leibniz Institute for Aston University Economic Research Aston Triangle at the University of Munich B$ 7ET Poschingerstr. 5 Birminghamton, UK 81679 Munich, Germany Phone: +44(0)121/204-3220 Phone: +49(0)89/9224-1258 [email protected] [email protected] Pablo Arocena Subal C.
    [Show full text]
  • Markets and Hierarchies: Analysis and Antitrust Implications
    Markets and Hierarchies: Analysis and Antitrust Implications A Study in the Economics of Internal Organization Oliver E. Williamson University of Pennsylvania THE FREE PRESS A Division of Macmillan Publishing Co., Inc. ~ NEW YORK Collier Macmillan Publishers LONDON ...... 1. Toward a New Institutional Economics A broadly based interest among economists in what might be referred to as the "new institutional economics" has developed in recent years. Aspects of mainline microtheory, economic history, the economics of property rights, comparative systems, labor economics, and industrial organization• have each had a bearing on this renaissance. The common threads that tie these various studies together are: (1) an evolving consensus that received microtheory, as useful and powerful as it is for many purposes, operates at too high a level of abstraction to permit many important microeconomic phenomena to be addressed in an uncontrived way; and (2) a sense that the study of "transactions," which concerned the institutionalists in the profes­ sion some forty years ago, is really a core matter and deserves renewed attention. Unlike the earlier institutionalists, however, the current group is inclined to be eclectic. The new institutional economists both draw on microtheory and, for the most part, regard what they are doing as comple­ mentary to, rather than a substitute for, conventional analysis. The spirit in which this present book is written very much follows the ~hinking of these new institutionalists. I hope, by exploring microeconomic Issues of markets and hierarchies in greater detail than conventional analysis commonly employs, to achieve a better understanding of the origins and functions of various firm and market structures- stretching from ele­ ~entary work groups to complex modern corporations.
    [Show full text]
  • Dynamic Duopoly with Output Adjustment Costs in International Markets: Taking the Conjecture out of Conjectural Variations
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Trade Policies for International Competitiveness Volume Author/Editor: Robert C. Feenstra, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-23949-7 Volume URL: http://www.nber.org/books/feen89-1 Conference Date: April 29-30, 1988 Publication Date: 1989 Chapter Title: Dynamic Duopoly with Output Adjustment Costs in International Markets: Taking the Conjecture out of Conjectural Variations Chapter Author: Robert Driskill, Stephen McCafferty Chapter URL: http://www.nber.org/chapters/c6178 Chapter pages in book: (p. 125 - 144) 4 Dynamic Duopoly with Output Adjustment Costs in International Markets: Taking the Conjecture out of Conjectural Variations Robert Driskill and Stephen McCafferty Microeconomics in general and trade economists in particular have made wide use of the conjectural variations approach to modeling oligopolistic behavior. Most users of this approach acknowledge its well-known shortcomings but defend its use as a “poor man’s’’ dynamics, capable of capturing dynamic considerations in a static framework. As one example, Eaton and Grossman ( 1986) organize discussion about optimal trade policy in international oligopolistic markets around the question of whether conjectural variations are Nash-Coumot, Bertrand, or consistent in the sense of Bresnahan (1981). Their primary finding is that the optimal policy might be a tax, a subsidy, or free trade, depending on whether the exogenous conjectural variation is Nash-Coumot, Bertrand, or consistent.
    [Show full text]
  • Conjectural Variation’ in Cournot Duopoly, Evaluate Its Impacts and Discuss the Policy Implication
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Munich Personal RePEc Archive MPRA Munich Personal RePEc Archive Explain `conjectural variation' in Cournot duopoly, evaluate its impacts and discuss the policy implication Niall Edward Douglas University of St. Andrews December 2006 Online at http://mpra.ub.uni-muenchen.de/13652/ MPRA Paper No. 13652, posted 27. February 2009 18:59 UTC Explain ‘conjectural variation’ in Cournot duopoly, evaluate its impacts and discuss the policy implication To fully understand the impacts and policy implications of conjectural variation, one must first understand the part it played in the great indeterminacy debate within marginal economics during the first half of the 20th century. Therefore, this paper shall begin with a short description and history of conjectural variation, followed by how the debates surrounding it led to the final resolution of the indeterminacy issue. The policy implications of that resolution for imperfect markets are then briefly discussed. Definition & History At the beginning of the 20th century, political economics, as it was still known then, was wrestling with the indeterminacy issue i.e.; whether an economy tended towards an equilibrium or not1. The prevailing mood of the time felt a strong need that an economy should be determinate as it was not understood then how otherwise an economy should not fall apart2. The problem was that empirical evidence strongly suggested indeterminacy, as did some of the most notable Economists of the time. F. Y. Edgeworth (1897) was considered to have given the authoritative judgement on the indeterminacy of Cournot duopoly by showing that the imposition of a quantity constraint caused the market price to oscillate inside an interval3.
    [Show full text]
  • United and American Airlines
    UC Berkeley Working Paper Series Title Estimating a Mixed Strategy: United and American Airlines Permalink https://escholarship.org/uc/item/2f36z7n1 Authors Golan, Amos Karp, Larry S. Perloff, Jeffrey M. Publication Date 1998-06-01 eScholarship.org Powered by the California Digital Library University of California Estimating a Mixed Strategy: United and American Airlines Amos Golan Larry S. Karp Jeffrey M. Perloff June 1998 Abstract We develop a generalized maximum entropy estimator that can estimate pure and mixed strategies subject to restrictions from game theory. This method avoids distributional assumptions and is consistent and efficient. We demonstrate this method by estimating the mixed strategies of duopolistic airlines. KEYWORDS: Mixed strategies, noncooperative games, oligopoly, maximum entropy, airlines JEL: C13, C35, C72, L13, L93 George Judge was involved in every stage of this paper and was a major contributor, but is too modest to agree to be a coauthor. He should be. We are very grateful to Jim Brander and Anming Zhang for generously providing us with the data used in this study. Contact: Jeffrey M. Perloff (510/642-9574; 510/643-8911 fax) Department of Agricultural and Resource Economics 207 Giannini Hall University of California Berkeley, California 94720 [email protected] Revised: June 25, 1998 Printed: July 23, 1999 Table of Contents 1. INTRODUCTION 1 2. OLIGOPOLY GAME 3 2.1 Strategies 4 2.2 Econometric Implications 5 3. GENERALIZED-MAXIMUM-ENTROPY ESTIMATION APPROACH 8 3.1 Background: Classical Maximum Entropy Formulation 8 3.2 The Basic Generalized Maximum Entropy Formulation 10 3.3 Generalized Maximum Entropy Formulation of the Nash Model 12 3.4 Properties of the Estimators and Normalized Entropy 13 4.
    [Show full text]
  • [email protected]
    A CONJECTURAL VARIATION COMPUTABLE GENERAL EQUILIBRIUM MODEL WITH FREE ENTRY by Roberto A. De Santis* The Kiel Institute of World Economics Düsternbrooker Weg 120, 24105, Kiel, Germany E-mail: [email protected] ABSTRACT: This paper proposes a procedure to incorporate the conjectural variation approach in Computable General Equilibrium (CGE) analysis such that the strategic interaction among rival firms in international markets can be modelled. It shows how to calibrate the conjectured reactions of rival domestic and foreign firms. It also shows that the approach suggested by Harrison, Rutherford and Tarr (henceforth, HRT) is valid if Cournot competition prevails among domestic firms, among foreign firms, and between domestic and foreign firms. A conjectural variation CGE model applied to Turkey indicates that, if Cournot competition prevails between domestic and foreign firms, the results obtained under the HRT approach are very similar to those obtained under the conjectural variation approach. However, if foreign firms expect that rival domestic firms would react to their own action, then the results change dramatically. In a more competitive context, a large welfare gain from trade liberalisation can be generated. KEYWORDS: Price cost margin, Conjectural variation, CGE analysis. JEL classification: D43, D58. * I am indebted to Glenn Harrison, Thomas Rutherford, Frank Stähler and John Whalley for their valuable comments on an early stage of this paper. All errors are my responsibility. 1. Introduction The CGE modelling literature has developed quite markedly in the last two decades. Initially, these models were constructed under the assumption of perfect competition and constant returns to scale (CRS). In the middle eighties, under the wave of the ‘new trade theory’,1 models with industrial organisation features were used to study the impact of trade policy actions when industries are characterised by endogenous market structure, and the economies to scale are exploited at firm level.
    [Show full text]
  • The Measurement of Conjectural Variations in an Oligopoly Industry
    EG & EA WORKING PAPERS THE MEASUREMENT OF CONJECTURAL VARIATIONS IN AN OLIGOPOLY INDUSTRY Robert P. Rogers WORKING PAPER NO. 102 November 1983 FI'CBureau of Ec onomics working papers arepreliminary materials circulated to stimulate discussion and critical comment All data contained in themare in the public domain. This includesinfo rmation obtained by the Commissionwhich has become part of public record. The analyses and conclusions set forth are those of the authors and do not necessarily reflect the views of othermemb ers of the Bureauof Economics, other Commission staff, or the Commission itself. Upon request, single copies of the paper will be provided. Referencesin publications to FTCBureau of Economics working papers by FTC economists (other than acknowledgement by a writer that he has accessto such unpublhed mat erial s) should be cleared with the author to protect the tentative character of these papers. BUREAUOF ECONOMICS FEDERALTRADE COMMISSION WASHINGTON,DC 20580 DRAF T (Please do not quote for re ference without permission) The Measurement of Conjectural Vari ations in an Oligopoly Industry by Ro bert P. Rogers Federal Trade Commission Washington, D.C. 20580 Novem ber 1983 The views expressed in this paper are those of the aut hor and therefore do not necessarily reflect the position of the Federal Trade Commission or any individual Commissioner. I. Introduction Oligopolistic markets are common if not ubiquitous, but econo­ mists have only put forth a num ber of competing hypotheses on how firms behave in these situations. The outstanding characteristic of these markets is that any one firm can significantly influence industry output and price.
    [Show full text]