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Price Formation and the Scope for Oligopolistic Conduct in a Small Open Economy*

Published online by Cambridge University Press:  17 August 2016

C. Huveneers
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Extract

The aim of this paper is to derive and test equilibrium relations between aggregated indices of market power, concentration and foreign trade variables. Encaoua and Jacquemin (1980) established such relationships between different measures of concentration and Lerner indices, but do not take into account international competition.

The first part of this paper provides a brief survey of previous theoretical work concerning the impact of foreign trade on domestic market performance, and derives a set of oligopolistic models for both homogeneous and differentiated goods in a open economy. The second part tests these models using a sample of 31 Belgian industrial sectors in 1973.

Because Belgium is a small open economy, Belgian producers are unable to affect prices on international markets for homogeneous goods (assuming there are no impediments to trade). Thus Belgian firms are expected to be price-takers enjoying no market power whatever the level of concentration. There are, however, situations in which firms in a small open economy could theoretically enjoy some market power. First, if there are impediments to trade, the domestic market can be separated from the foreign market so that domestic producers are able to charge higher prices at home than given world market price (price discrimination). Second, industries manufacturing differentiated goods for which no perfect substitutes are being produced in the rest of the world face a downward-sloping demand curve.

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 47 , Issue 3-4 , September 1981 , pp. 209 - 242
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1981 

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Footnotes

**

Catholic University of Louvain (Center for Economic and Legal Research in Industrial Organization) Société Générale de Belgique (Department of Economic Studies) and University of Caen.

*

This study benefited from the support of the Fonds de la Recherche Fondamenlale Collective (research project n° 2.4534.82).

The author would like to acknowledge helpful comments from M. Spiegel and F. Mélèse (UCL). He also thanks J. Demeulenaere (Belgian National Institute of Statistics) who provided him with the necessary statistical information and A. Barideau (Société Générale de Belgique) who helped him in building the databank. The assistance of C. Morel in computer processing was invaluable. The manuscript was improved most efficiently by E. MacGregor and typed by C. Ghesquiere and C. Stage. Last but not least, discussions and previous work with E. de Ghellinck and A. Jacquemin (UCL) deserve credit for having initiated this paper. The usual disclaim applies.

References

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