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Revisiting Strategic Trade Theory

  • Indrani Roy Chowdhury
Chapter

Abstract

This chapter reviews some important issues of strategic trade literature that use the assumption of imperfect competition and increasing returns of scale. One of the seminal papers by Krugman (Import protection as export promotion: international competition in the presence of oligopoly and economies of scale. Kierzkowski H (ed) Monopolistic competition and international trade. Oxford University Press, Oxford, 1984) seeks to formalize the notion that import protection leads to export promotion in the presence of economies of scale (both static and dynamic). However, Krugman argues that in the absence of dynamic scale economies, the formalization of this idea appears to require the “heterodox” assumption that marginal costs are decreasing. This chapter seeks to extend Krugman by providing an alternative foundation for the idea based on free entry and linear marginal costs. Interestingly, the welfare implications are sensitive to whether there is free entry in only one of the countries, or both, as well as to whether import protection is of the tariff or the nontariff kind.

Notes

Acknowledgements

We are deeply indebted to an anonymous referee for very helpful and incisive comments that led to substantial improvements in the paper. We would like to thank Tarun Kabiraj, Sugata Marjit, Ajitava Ray Chaudhuri, and Soumyen Sikdar for their comments on earlier versions of this paper.

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© The Author(s) 2017

Authors and Affiliations

  • Indrani Roy Chowdhury
    • 1
  1. 1.Centre for the Study of Regional Development (CSRD)Jawaharlal Nehru University (JNU)New DelhiIndia

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