Model of the Monopolistic Market

Running head MONOPOLISTIC COMPETITION AND INTERNATIONAL TRADE MONOPOLISTIC COMPETITION AND INTERNATIONAL TRADE Name of the Student: Name of the University: Author ’snote: 1 MONOPOLISTIC COMPETITION AND INTERNATIONAL TRADE Table of Contents Script .......................................................................................................................................... 2 References .................................................................................................................................. 4 2 MONOPOLISTIC COMPETITION AND INTERNATIONAL TRADE Script The monopolistically competitive market would have higher number of firms and have monopolistic power in the producing differentiated products (Dhingra & Morrow, 2019) . The firms try to charge higher prices only due to this differentiated product. The two concept that are related with the international trade and market structure is that nations need to specialize in aproduct and for specialization there is the need for comparative advantage and lower opportunity costs. The economies of scale ensures that the comparative advantage is there (Bartelme et al., 2018) .It is hence important to find whether in global market the firms are price makers or price takers. The trade model of the monopolistic market have assumptions like, all firms have similar costs and the demand function. They are symmetric in nature and in equilibrium they charge in same price (Krugman, Obstfeld & Melitz, 2017) .The relationship between average cost and number of firms is to be determined to understand the impact of the market structure on the firm. There is a positive relation between average costs and number of firms because more N, lower will be the quantity and higher will be the average cost. The relation between number of firms and price of the product is negative in nature. Higher competition from more number of firms (Haaland & Venables, 2016) ,higher pressure on price to reduce. 3 MONOPOLISTIC COMPETITION AND INTERNATIONAL TRADE Figure 1Equilibrium The equilibrium is achieved at point where the price and average costs is equal at aunique number of firms. At this point when the price and the average cost are equal the firms will not earn supernormal profit but they earn normal profits. Thus the firms will be a price taker depending upon the number of firms and this calls for an optimal trade policy. The economies of scale is achieved with this unique number of N* (Santos-Paulino, 2017) . 4 MONOPOLISTIC COMPETITION AND INTERNATIONAL TRADE References Bartelme, D., Costinot, A., Donaldson, D., & Rodriguez-Clare, A. (2018). Economies of Scale and Industrial Policy: A View from Trade. NBER Working Paper . Dhingra, S., & Morrow, J. (2019). Monopolistic competition and optimum product diversity under firm heterogeneity. Journal of Political Economy ,127 (1), 196-232. Haaland, J. I., & Venables, A. J. (2016). Optimal trade policy with monopolistic competition and heterogeneous firms. Journal of International Economics ,102 ,85-95. Krugman, P., Obstfeld, M., & Melitz, M. (2017). International Economics: Theory and Policy. Pearson. Santos-Paulino, A. U. (2017). Estimating the impact of trade specialization and trade policy on poverty in developing countries. The Journal of International Trade & Economic Development ,26 (6), 693-711.