Intra-Industry Trade: Imperfect Competition, Increasing Returns to Scale, and Product Differentiation

In the last chapter we analysed how Linder (1961) emphasised, although without using the term ‘intra-industry trade’, the importance of varieties and differentiated products in determining the volume of trade between countries with similar levels of per capita income. Ever since Grubel and Lloyd (1975) published their book Intra-Industry Trade, a large literature, both theoretical and empirical, has come to exist. Theoretical attempts to demonstrate how intra-industry trade (HT) is generated have broken into new theoretical horizons by incorporating oligopolistic market structure, increasing returns to scale, product differentiation and monopolistic competition. Various economists have put forward various models which incorporate a variety of specific assumptions. All these theoretical models now constitute the bulk of what has come to be known as the ‘new trade theory’. It is true to say that none of the new models in this area has yet attained the theoretical robustness of the HOS model. A general intra-industry trade model has not yet surfaced, but models are gravitating towards four core theoretical approaches (which are discussed later). This chapter discusses models which are representative of the major approaches to intra-industry trade.