82181 - Industrial Economics and International Trade

Course Unit Page

Academic Year 2021/2022

Learning outcomes

The aim of the course is to present the main theories of international trade and investment, and the related industrial organisation concepts. First, the course analyses the interaction of firms in the market, focusing on their strategic behaviour and on how the latter is affected by the degree of competition. Second, the course introduces the main models of international trade and multinational firms to illustrate how international trade and investment affect consumers and firms, and how they impact on welfare. At the end of the course students are able to: (a) understand the causes and consequences of international trade and investment; (b) evaluate the implications of trade and investment policies in terms of welfare; (c) apply strategic interaction among firms in the context of open economies.

Course contents

Prerequisites: Knowledge of Microeconomics (to the equivalent of 37293) as well as of single variable differential calculus are strongly recommended.

A) Traditional theories of international trade

The general traditional model of international trade. Autarkic equilibrium. Free-trade equilibrium. Gains from trade in consumption and production. The direction of trade. The excess demand curve (net imports). [Slides]

The Ricardian model of international trade. The concept of opportunity-cost. The Ricardian model of trade: assumptions: the linear production possibility frontier; definition of autarkic equilibrium; the free-trade equilibrium; the excess demand curve in the Ricardian model; gains from trade. [Slides]

The Heckscher-Ohlin model of international trade. Overview. The model: assumptions; production in a small open economy; factor prices and commodity prices; the Stolper-Samuelson theorem; international equilbrium; integrated equilibrium; the theorem of equalization of factors prices; the Rybczynski theorem; the Heckscher-Ohlin theorem; international trade and income distribution. [Slides]

B) Market power and new theories of international trade

Models of international trade with increasing returns to scale and imperfect competition. Non-discriminatory pricing with market power. Free entry and monopolistic competition. Pro-competitive effect (Markusen). Selection effect. Variety effect (Dixit and Norman). Strategic dumping (Brander and Krugman) [Slides]

C) International trade policy

International trade policy. Efficiency and equity. What is protectionism in trade? Protectionism in trade: demand, supply and trade with a single industry; the effect of an import tariff - the case of a small economy; the effect of an export subsidy - the case of a small economy. [Slides]

International trade policy: arguments in favor of protectionism. Overview. Traditional arguments in favor of protectionism: the argument of a big economy (effect on the terms of trade); the argument of the infant industry; the argument of increasing returns to scale; the argument of internal market distortions. [Slides]

D) Contracts, multinational enterprises and Foreign Direct Investment

Multinational enterprises and Foreign Direct Investment. Definitions. Stylized facts. Advantages (and disadvantages) of multinationals. [Slides]

Location and organization choices. Horizontal and vertical FDI. Contractual incompleteness and outsourcing. Dissipation of specific capital and licensing. [Slides FDI.1] [Slides FDI.2] [Slides FDI.3] [Slides FDI.4] [Slides FDI.5]

E) Market power and industrial organization

Pricing with market power. First, Second and Third-degree price discrimination. Block pricing. Two-part tariff. [Slides]

Bundling with market power. Relative valuations. Entry deterrence (Nalebuff). Mixed bundling. Tie-in sales. Complementary goods. Applications to competition policy. [Slides]

Product variety and quality with market power. Horizontal product differentiation (Hotelling). Vertical product differentiation. [Slides]

Readings/Bibliography

Some topics are based on the same textbook used for the first-year Microeconomics class: Pindyck R. S., Rubinfeld D. L. (2018) Microeconomics. Pearson.

For International Trade the textbook is: Krugman P. R., Obstfeld M., Melitz M. J. (2015) International Economics: theory and policy. Pearson. Three copies of this textbook are available at the Central Library Roberto Ruffilli (two copies are available for borrowing, the other is not).

Another book that is useful for International Trade is: Markusen J. R., Melvin J. R., Kaempfer W. H., Maskus K. E. (1995) International Trade: Theory and Evidence. McGraw-Hill. ISBN: 0-07-040447-X. Five copies of this book are available at the Central Library Roberto Ruffilli.

For Industrial Economics the textbook is: Pepall L., Richards D., Norman G. (2014) Industrial organization: contemporary theory and empirical applications. Wiley.

Teaching methods

Hybrid teaching.

Assessment methods

A Question Bank with previous exam questions is available for students. Here is the link for the International Trade part. And here is the link for the Industrial Economics part.

The final grade of the exam is based on a written exam. During the academic year there are two optional partial exams, each consisting of three open questions and four multiple choice questions. Students that pass the partial exams do not need to take the final written exam.

The final grade is made of two components. The first component is proportional to the number of correct answers to multiple choice questions, with a penalization assigned to a wrong answer. The second component descends from open questions, where each open question is assigned a grade on a scale based on clarity of exposition, completeness of the answer, and accuracy of analytical derivations.

In case of a positive final grade the student has the right to renege on the grade only once.

Teaching tools

Lecture Notes are created with Microsoft OneNote and are immediately shared with students.

Video recorded lectures are available on the Microsoft Stream platform. Please visit the dedicated website.

Office hours

See the website of Gaetano Alfredo Minerva