Imperfect Competition: Modelling Alternatives and Sensitivity

There is a widespread suspicion that traditional studies of trade policy reform under perfect competition miss a crucial part of the plot by neglecting potential pro-competitive industrial organisation effects such as scale economy gains and price mark-up reductions commonly emphasised by proponents of trade liberalisation and regional integration schemes. In order to account for industrial organisation effects, a model featuring imperfectly competitive supply behaviour and increasing returns to scale is required. Yet once the clear-cut world of perfect competition is left behind, a broad menu of a priori plausible alternative specifications of firm conduct opens up. As Helpman and Krugman (1989) put it, ‘there is only one way to be perfect but many ways to be imperfect’. Since the empirical industrial organisation literature provides little guidance with respect to the appropriate model of firm conduct, an essentially subjective decision by the model-builder is required at this stage. The danger that the particular choice of specification may crucially predetermine the tenor of CGE simulation results calls for extensive sensitivity analyses across the spectrum of alternative oligopoly models in order to assess the robustness of results. However, practical feasibility constraints necessarily limit the scope for sensitivity analysis in large-scale multi-sector multi-region models like the GEM-E3 framework. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.