Two and a Half Theories of Trade

J. Peter Neary


This paper discusses the place of oligopoly in international trade theory, and argues that it is unsatisfactory to ignore firms altogether, as in perfectly competitive models, or to view large firms as more productive clones of small ones, as in monopolistically competitive models. Doing either fails to account for the "granularity" in the size distribution of firms and for the dominance of large firms in exporting. The paper outlines three ways of developing more convincing models of oligopoly, which allow for free entry but do not lose sight of the grains in "granularity": heterogeneous industries, natural oligopoly, and superstar firms.

JEL Codes: F12, F10

Keywords: GOLE (General Oligopolistic Equilibrium); granularity; heterogeneous firms; international trade and market structure.

Forthcoming in The World Economy, 2010. Click here for a pre-publication pdf version.

This paper is a revised version of the 2009 Frank D. Graham Memorial Lecture at Princeton University, and the 2009 World Economy Annual Lecture at the University of Nottingham. Click here for the Princeton version, which differs only in having some Princeton-specific jokes.

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