82181 - Industrial Economics and International Trade

Learning outcomes

The aim of the course is to introduce the student to the main concepts of industrial organisation in the context of open economies. First, the course analyses the interaction of firms in the market focusing on their strategic behaviour and on how the latter is affected by competition policy. Second, the course introduces the models of international trade to illustrate how international competition affects firms and country behaviour and its impact on economic growth. At the end of the course students are able to: (a) understand strategic interaction of firms; (b) evaluate the role of competition policy; (c) understand how international trade fosters economic growth.

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

Blended teaching.

Assessment methods

The final mark of the exam is based on a final written exam. Some old exam papers for the International Trade part are available here.

In case of a positive final mark the student has the right to renege on the mark 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