The relation among imperfect competition, trade, and transportation costs

This study broadens the definition of imperfect competition in trade to include imperfections caused by transportation costs. The trade literature on imperfect competition and trade, to date, ignores transportation costs and treats countries as points in space rather than spatial areas within which demand is distributed. To fill this gap in the literature, this study develops a model of international trade with continuous space and positive transportation costs. This spatial duopoly model allows for the determination of foreign and domestic pricing decisions, the domestic firm's location decision, and the market radius of both firms. In this model, a foreign firm establishes itself as a spatial monopolist in a domestic country, and the domestic firm reacts to the foreign firms deterrent behavior. When the domestic firm perceives a very aggressive foreign firm that is able to maintain its market boundary and the delivered price at that boundary, its location decision is asymmetric--it does not locate in the center of its market.;This study also empirically tests the effectiveness of strategic trade policy in an imperfectly competitive industry. The jet engine industry is chosen because in the case of the competition to power Boeing's 757, the competing duopolists were Pratt & Whitney and Rolls-Royce. The model used in this application is appropriate for trade in costly durable goods that follow a lumpy purchase pattern. Production costs are represented by a learning curve specification, and the firms' strategies are modeled as Cournot competition. Even for the more profitable firm, it can take 11 years after the first delivery to make a profit. The study concludes that the survival of both firms (especially Rolls-Royce) depends on government support.;The model is very sensitive to some of its parameters, particularly the demand price elasticity and the learning curve elasticity. The framework developed here, which includes a spatial duopoly model, provides a policy mechanism that a government can use to evaluate its role in supporting the development and trade of costly durable goods.