Page 228 - Global Political Economy_Understanding The International Economic Order

THE TRADI NG SYS TEM
Under conditions ofperfect competition, strategic behavior is not
possible because the behavior ofone or just a few firms cannot sig-
nificantly change market conditions for other firms. However, if unit
costs in certain industries do continue to fall as output increases
(economies ofscale), the total output offirms will expand but the
number offirms will decrease. Economies ofscale in an industry
mean that the market will support only one or just a few large firms;
that is, the industry will become oligopolistic, and the market will
eventually be dominated by a few firms. This would permit the behav-
ior of one firm to make a difference and to alter the decisions of other
firms. Ifimperfect or oligopolistic competition exists, then monopoly
rents or abnormally high profits can exist in that economic sector; the
resultant rents or superprofits could then be captured by a small num-
ber offirms or even by one firm. Individual firms, then, may well
pursue corporate strategies to increase their profits or economic rents.
Oligopolistic firms can and do consciously choose a course ofac-
tion that anticipates the behavior oftheir competitors. Ifsuccessful,
such action enables them to capture a much larger share ofthe market
than would be the case under conditions ofperfect competition. For
example, oligopolistic firms can and do follow strategies in which
they adjust their own prices and output in order to alter the prices
and output ofcompetitor firms. Two of the most important strategies
used to increase a firm’s long-term domination ofan oligopolistic
market are dumping (selling below cost to drive out competitors in
the product area) and preemption (through huge investment in pro-
ductive capacity to deter other entrants into the market).
Imperfect or oligopolisitc competition is most likely found in cer-
tain high-tech industries characterized by economies ofscale and
learning by doing. The sectors most likely to become oligopolistic
include computers, semiconductors, and biotechnology; these tech-
nologies, ofcourse, are identified by most governments as the “com-
manding heights” ofthe information economy. Many are dual tech-
nologies, because they are very important to both military weaponry
and to economic competitiveness. Many countries consider it essential
for both commercial and security reasons to take actions that will
ensure a strong presence in some or all ofthese sectors. The impor-
tance ofa head start in these industries encourages firms to pursue a
“first-mover” strategy so that cumulative processes and path depen-
dence will strengthen their market position.
The theory ofstrategic trade takes the existence ofimperfect or
oligopolistic competition one step further and suggests that a govern-
ment can take specific actions to help its own oligopolistic firms. Gov-
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