Trade under imperfect competition

Traditional trade theory assumes perfect competition, but much world trade is in industries with a few large firms, differentiated products and economies of scale — cars, aircraft, electronics. With imperfect competition, trade can arise even between identical countries: each country specialises in some varieties and consumers gain from greater choice and lower prices through scale. Strategic trade policy goes further: governments may subsidise a domestic firm to shift oligopoly profits from foreign rivals to itself. Worked example: in a market with one domestic and one foreign firm and total profit of 100, a subsidy that lets the domestic firm commit to higher output can shift, say, 30 of profit from the foreign firm to the domestic one — the Brander-Spencer profit-shifting argument.