General Oligopolistic Equilibrium (GOLE) in Trade

Abstract

Purpose – The purpose of this paper is to develop a tractable general-equilibrium model, where the market is mixed of large firms (oligopoly) and small firms (monopolistic competition). We will provide new implication of trade gain.

Design/Methodology/Approach – Our discussion relies on theoretic analysis for the interaction between large firms and small firms. Large firms compete in quantity-setting (Cournot-competition) so that strategically behave. Large firms are a first-mover while small firms are a second-mover.

Findings – When the economy is open, the market-expansion effect induces large firms to reschedule to produce more, and to demand more high-quality workers. The expansion of output-schedules crowds out the production of small firms. The demand of high-quality workers widens wage inequality within country. Small firms lose from trade. However, the more productive workers of small firms gain because large firms offers them jobs. Not all large firms gain. Firms of low-quality workers would lose from trade.

Research Implications or Originality – Overall, the effect of trade liberalization on welfare is ambiguous. It depends on distribution of labor qualities and number of large firms. When a country is abundant (scarce) of high-quality laborers, welfare improves (declines). When both countries have the same distribution of labor qualities, welfare improves in the country with a greater number of large firms. This paper can contribute to the literature of granular firms, labor market imperfection, and trade.