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Product Differentiation, Decreasing Costs, and Intra-sectoral Trade

In: Growth and International Trade

Author

Listed:
  • Karl Farmer

    (University of Graz)

  • Matthias Schelnast

    (University of Graz)

Abstract

This chapter leaves (neo-) classical trade theory in order to be able to address the astonishing phenomenon of enormous international trade among similarly developed industrialized countries. The traditional assumptions of perfect competition in all markets, of trade with standardized homogeneous goods and of constant returns to scale are replaced by monopolistic competition in output markets, product differentiation and decreasing average production costs. This change in the market and cost structure enables us to address intra-industry (intra-sectoral) trade among highly developed countries. In formalizing Linder’s (An essay on trade and transformation. New York: Wiley, 1961) pioneering work on a demand-oriented trade theory in line with the already classic Dixit-Stiglitz (American Economic Review, 67, 297–308, 1977) approach, we present a full-fledged monopolistic equilibrium solution with a 100 % of intra-sectoral trade.

Suggested Citation

  • Karl Farmer & Matthias Schelnast, 2013. "Product Differentiation, Decreasing Costs, and Intra-sectoral Trade," Springer Texts in Business and Economics, in: Growth and International Trade, edition 127, chapter 11, pages 235-257, Springer.
    • Handle: RePEc:spr:sptchp:978-3-642-33669-0_11
    DOI: 10.1007/978-3-642-33669-0_11
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