International competition, growth and welfare

Opening up to trade implies a change in market structure as firms are expos ed to new competitors. If foreign and domestic firms produce close substitu tes, their interaction in the product market forces prices below the monopo listic level. Demand shifts from monopolistic to oligopolistic varieties an d incentives to develop new varieties are reduced. The changing market stru cture constitutes a market failure as competition becomes asymmetric. If th e scale and the intensity of competition are large, trade will reduce the w elfare level even below the autarky level. Temporary, declining tariffs on all imports and permanent tariffs on oligopolistic varieties are instrument s to improve welfare. (C) 2001 Elsevier Science B.V. All rights reserved.