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1、Copyright 2012 Pearson Education.All rights reserved.Chapter 8Firms in the Global Economy:Export Decisions,Outsourcing,and Multinational EnterprisesCopyright 2012 Pearson Education.All rights reserved.PreviewMonopolistic competition and tradeThe significance of intra-industry tradeFirm responses to
2、trade:winners,losers,and industry performanceDumpingMultinationals and outsourcing2Copyright 2012 Pearson Education.All rights reserved.IntroductionWhen economies of scale exist,large firms may be more efficient than small firms,and the industry may consist of a monopoly or a few large firms.Product
3、ion may be imperfectly competitive in the sense that excess or monopoly profits are captured by large firms.Internal economies of scale result when large firms have a cost advantage over small firms,causing the industry to become uncompetitive.3Copyright 2012 Pearson Education.All rights reserved.In
4、troduction(cont.)Internal economies of scale imply that a firms average cost of production decreases the more output it produces.Perfect competition that drives the price of a good down to marginal cost would imply losses for those firms because they would not be able to recover the higher costs inc
5、urred from producing the initial units of output.As a result,perfect competition would force those firms out of the market.4Copyright 2012 Pearson Education.All rights reserved.Introduction(cont.)In most sectors,goods are differentiated from each other and there are other differences across firms.In
6、tegration causes the better-performing firms to thrive and expand,while the worse-performing firms contract.Additional source of gain from trade:As production is concentrated toward better-performing firms,the overall efficiency of the industry improves.Study why those better-performing firms have a
7、 greater incentive to engage in the global economy.5Copyright 2012 Pearson Education.All rights reserved.The Theory of Imperfect CompetitionIn imperfect competition,firms are aware that they can influence the prices of their products and that they can sell more only by reducing their price.This situ
8、ation occurs when there are only a few major producers of a particular good or when each firm produces a good that is differentiated from that of rival firms.Each firm views itself as a price setter,choosing the price of its product.6Copyright 2012 Pearson Education.All rights reserved.Monopoly:A Br
9、ief ReviewA monopoly is an industry with only one firm.An oligopoly is an industry with only a few firms.In these industries,the marginal revenue generated from selling more products is less than the uniform price charged for each product.To sell more,a firm must lower the price of all units,not jus
10、t the additional ones.The marginal revenue function therefore lies below the demand function(which determines the price that customers are willing to pay).7Copyright 2012 Pearson Education.All rights reserved.Monopoly:A Brief ReviewAssume that the demand curve the firm faces is a straight line Q=A B
11、(P),where Q is the number of units the firm sells,P the price per unit,and A and B are constants.Marginal revenue equals MR=P Q/B.Suppose that total costs are C=F+c(Q),where F is fixed costs,those independent of the level of output,and c is the constant marginal cost.8Copyright 2012 Pearson Educatio
12、n.All rights reserved.Fig.8-1:Monopolistic Pricing and Production Decisions9Copyright 2012 Pearson Education.All rights reserved.Monopoly:A Brief Review(cont.)Average cost is the cost of production(C)divided by the total quantity of production(Q).AC=C/Q=F/Q+c Marginal cost is the cost of producing a
13、n additional unit of output.A larger firm is more efficient because average cost decreases as output Q increases:internal economies of scale.10Copyright 2012 Pearson Education.All rights reserved.Fig.8-2:Average Versus Marginal Cost11Copyright 2012 Pearson Education.All rights reserved.Monopoly:A Br
14、ief Review(cont.)The profit-maximizing output occurs where marginal revenue equals marginal cost.At the intersection of the MC and MR curves,the revenue gained from selling an extra unit equals the cost of producing that unit.The monopolist earns some monopoly profits,as indicated by the shaded box,
15、when P AC.12Copyright 2012 Pearson Education.All rights reserved.Monopolistic CompetitionMonopolistic competition is a simple model of an imperfectly competitive industry that assumes that each firm1.can differentiate its product from the product of competitors,and2.takes the prices charged by its r
16、ivals as given.13Copyright 2012 Pearson Education.All rights reserved.Monopolistic Competition(cont.)A firm in a monopolistically competitive industry is expected to sellmore as total sales in the industry increase and as prices charged by rivals increase.less as the number of firms in the industry
17、decreases and as the firms price increases.These concepts are represented by the function:14Copyright 2012 Pearson Education.All rights reserved.Monopolistic Competition(cont.)Q=S1/n b(P P)Q is an individual firms salesS is the total sales of the industryn is the number of firms in the industryb is
18、a constant term representing the responsiveness of a firms sales to its priceP is the price charged by the firm itselfP is the average price charged by its competitors 15Copyright 2012 Pearson Education.All rights reserved.Monopolistic Competition(cont.)Assume that firms are symmetric:all firms face
19、 the same demand function and have the same cost function.Thus all firms should charge the same price and have equal share of the market Q=S/nAverage costs should depend on the size of the market and the number of firms:AC=C/Q=F/Q+c=n F/S+c16Copyright 2012 Pearson Education.All rights reserved.Monop
20、olistic Competition(cont.)AC=n(F/S)+cAs the number of firms n in the industry increases,the average cost increases for each firm because each produces less.As total sales S of the industry increase,the average cost decreases for each firm because each produces more.17Copyright 2012 Pearson Education
21、.All rights reserved.Fig.8-3:Equilibrium in a Monopolistically Competitive Market18Copyright 2012 Pearson Education.All rights reserved.Monopolistic Competition(cont.)If monopolistic firms face linear demand functions,Q=A B(P),where A and B are constants.When firms maximize profits,they should produ
22、ce until marginal revenue equals marginal cost:MR=P Q/B=cAs the number of firms n in the industry increases,the price that each firm charges decreases because of increased competition.19Copyright 2012 Pearson Education.All rights reserved.Monopolistic Competition(cont.)At some number of firms,the pr
23、ice that firms charge(which decreases in n)matches the average cost that firms pay(which increases in n).At this long-run equilibrium number of firms in the industry,firms have no incentive to enter or exit the industry.20Copyright 2012 Pearson Education.All rights reserved.Monopolistic Competition(
24、cont.)If the number of firms is greater than or less than the equilibrium number,then firms have an incentive to exit or enter the industry.Firms have an incentive to exit the industry when price average cost.21Copyright 2012 Pearson Education.All rights reserved.Monopolistic Competition and TradeBe
25、cause trade increases market size,trade is predicted to decrease average cost in an industry described by monopolistic competition.Industry sales increase with trade leading to decreased average costs:AC=n(F/S)+cBecause trade increases the variety of goods that consumers can buy under monopolistic c
26、ompetition,it increases the welfare of consumers.And because average costs decrease,consumers can also benefit from a decreased price.22Copyright 2012 Pearson Education.All rights reserved.Fig.8-4:Effects of a Larger Market23Copyright 2012 Pearson Education.All rights reserved.Monopolistic Competiti
27、on and Trade(cont.)As a result of trade,the number of firms in a new international industry is predicted to increase relative to each national market.But it is unclear if firms will locate in the domestic country or foreign countries.Integrating markets through international trade therefore has the
28、same effects as growth of a market within a single country.24Copyright 2012 Pearson Education.All rights reserved.Fig.8-5:Equilibrium in the Automobile Market25Copyright 2012 Pearson Education.All rights reserved.Fig.8-5:Equilibrium in the Automobile Market(cont.)26Copyright 2012 Pearson Education.A
29、ll rights reserved.Table 8-1:Hypothetical Example of Gains from Market Integration27Copyright 2012 Pearson Education.All rights reserved.Monopolistic Competition and Trade(cont.)Product differentiation and internal economies of scale lead to trade between similar countries with no comparative advant
30、age differences between them.This is a very different kind of trade than the one based on comparative advantage,where each country exports its comparative advantage good.28Copyright 2012 Pearson Education.All rights reserved.The Significance of Intra-industry TradeIntra-industry trade refers to two-
31、way exchanges of similar goods.Two new channels for welfare benefits from trade:Benefit from a greater variety at a lower price.Firms consolidate their production and take advantage of economies of scale.A smaller country stands to gain more from integration than a larger country.29Copyright 2012 Pe
32、arson Education.All rights reserved.The Significance of Intra-industry Trade(cont.)About 2550%of world trade is intra-industry.Most prominent is the trade of manufactured goods among advanced industrial nations,which accounts for the majority of world trade.For the United States,industries that have
33、 the most intra-industry tradesuch as pharmaceuticals,chemicals,and specialized machineryrequire relatively larger amounts of skilled labor,technology,and physical capital.30Copyright 2012 Pearson Education.All rights reserved.Table 8-2:Indexes of Intra-Industry Trade for U.S.Industries,200931Copyri
34、ght 2012 Pearson Education.All rights reserved.Firm Responses to TradeIncreased competition tends to hurt the worst-performing firms they are forced to exit.The best-performing firms take the greatest advantage of new sales opportunities and expand the most.When the better-performing firms expand an
35、d the worse-performing ones contract or exit,overall industry performance improves.Trade and economic integration improve industry performance as much as the discovery of a better technology does.32Copyright 2012 Pearson Education.All rights reserved.Fig.8-6:Performance Differences Across Firms33Cop
36、yright 2012 Pearson Education.All rights reserved.Trade Costs and Export DecisionsMost U.S.firms do not report any exporting activity at all sell only to U.S.customers.In 2002,only 18%of U.S.manufacturing firms reported any sales abroad.Even in industries that export much of what they produce,such a
37、s chemicals,machinery,electronics,and transportation,fewer than 40 percent of firms export.A major reason why trade costs reduce trade so much is that they drastically reduce the number of firms selling to customers across the border.Trade costs also reduce the volume of export sales of firms sellin
38、g abroad.34Copyright 2012 Pearson Education.All rights reserved.Fig.8-7:Winners and Losers from Economic Integration35Copyright 2012 Pearson Education.All rights reserved.Trade Costs and Export Decisions(cont.)Trade costs added two important predictions to our model of monopolistic competition and t
39、rade:Why only a subset of firms export,and why exporters are relatively larger and more productive(lower marginal costs).Overwhelming empirical support for this prediction that exporting firms are bigger and more productive than firms in the same industry that do not export.In the United States,in a
40、 typical manufacturing industry,an exporting firm is on average more than twice as large as a firm that does not export.Differences between exporters and nonexporters are even larger in many European countries.36Copyright 2012 Pearson Education.All rights reserved.Table 8-3:Proportion of U.S.Firms R
41、eporting Export Sales by Industry,200237Copyright 2012 Pearson Education.All rights reserved.Fig:8-8:Export Decisions with Trade Costs38Copyright 2012 Pearson Education.All rights reserved.DumpingDumping is the practice of charging a lower price for exported goods than for goods sold domestically.Du
42、mping is an example of price discrimination:the practice of charging different customers different prices.Price discrimination and dumping may occur only ifimperfect competition exists:firms are able to influence market prices.markets are segmented so that goods are not easily bought in one market a
43、nd resold in another.39Copyright 2012 Pearson Education.All rights reserved.Dumping(cont.)Dumping can be a profit-maximizing strategy:A firm with a higher marginal cost chooses to set a lower markup over marginal cost.Therefore,an exporting firm will respond to the trade cost by lowering its markup
44、for the export market.This strategy is considered to be dumping,regarded by most countries as an“unfair”trade practice.40Copyright 2012 Pearson Education.All rights reserved.Protectionism and DumpingA U.S.firm may appeal to the Commerce Department to investigate if dumping by foreign firms has injur
45、ed the U.S.firm.The Commerce Department may impose an“anti-dumping duty”(tax)to protect the U.S.firm.Tax equals the difference between the actual and“fair”price of imports,where“fair”means“price the product is normally sold at in the manufacturers domestic market.”41Copyright 2012 Pearson Education.
46、All rights reserved.Protectionism and Dumping(cont.)42Copyright 2012 Pearson Education.All rights reserved.Protectionism and Dumping(cont.)Most economists believe that the enforcement of dumping claims is misguided.Trade costs have a natural tendency to induce firms to lower their markups in export
47、markets.Such enforcement may be used excessively as an excuse for protectionism.43Copyright 2012 Pearson Education.All rights reserved.Multinationals and OutsourcingForeign direct investment refers to investment in which a firm in one country directly controls or owns a subsidiary in another country
48、.If a foreign company invests in at least 10%of the stock in a subsidiary,the two firms are typically classified as a multinational corporation.10%or more of ownership in stock is deemed to be sufficient for direct control of business operations.44Copyright 2012 Pearson Education.All rights reserved
49、.Multinationals and Outsourcing(cont.)Greenfield FDI is when a company builds a new production facility abroad.Brownfield FDI(or cross-border mergers and acquisitions)is when a domestic firm buys a controlling stake in a foreign firm.Greenfield FDI has tended to be more stable,while cross-border mer
50、gers and acquisitions tend to occur in surges.45Copyright 2012 Pearson Education.All rights reserved.Multinationals and Outsourcing(cont.)Developed countries have been the biggest recipients of inward FDI.much more volatile than FDI going to developing and transition economies.Steady expansion in th