International Trades: Accounting (Essay Sample)

How International Trade is changing the Paradigm of Market Structures

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Introduction
International trade refers to the exchange of goods, capital, or services across various international borders. This kind of trade is important for most countries because it represents a significant portion of a country’s GDP. Even so, this kind of trade carried out on a global scale has greatly changed the paradigm of market structures. Consequently, firms operating in different market structures have experienced a reduction in their market power. The paper will employ economic concepts related to monopolies, perfect competition, oligopolies, and monopolies to explain how international trade has caused a reduction in market power and its overall impact on consumer and producer surplus.
Firstly, international trade has greatly changed the model of markets that have perfect competition. Initially, firms in a perfectly competitive market sold products that had identical features. This meant that a single firm could not cause a significant influence in the changes of prices because the products were perfectly homogenous with regards to taste, size, ingredients, color and quality. However, international trade has changed this situation because products are no longer perfectly homogenous (Neumann & Weigand, 2004). Rather, the same products now have different features as international trade promotes stiff competition. Therefore, a single firm can influence the price of a product in a perfectly competitive market because of the high quality and unique features of its products as well as the strong brand presence it has created for itself. For instance, consumers would prefer a Japanese car as opposed to one made in German or China because of the brand it has created for itself. This means that even if the price of the Japanese car is highest in the market place, more consumers would still prefer their product because of its durability.
As such, international trade has caused firms to experience less market power because only the firms that constantly produce the products that match with consumer expectations can stay relevant in the market (Gandolfo, 1998). Interestingly, no matter how good a firm is, if they do not constantly innovate then they too will lose their market power. Additionally, international trade causes the producer’s surplus to become obsolete within a very changing especially due to the constant changes in technology. On the other hand, there is a small margin in consumer surplus because they are able to get products that are of high quality at prices that are affordable because of the increased competition brought by international trade.
Another aspect of perfect competition that has realized a paradigm because of international trade is that of government intervention. The factors of demand and supply were the major determinants of price and as such, there was no government interference. However, globalization of trade has prompted the government to get involved in the activities of the marketplace especially for purposes of taxation. Nations have established numerous trade barriers in order to limit the levels of imports obtained from other countries. These barriers have been placed in form of direct quotas and taxes on all foreign goods in a bid to protect domestic workers and industries from foreign competition (Dwivedi, 2006). In this regard, many foreign companies have lost their market power despite the principle of free entry and exit being in place and thus the GATT (General Agreement on Tariffs and Trade) is simply an attempt to ensure that firms enhance their market power by pushing for a reduction in the various types of trade barriers.
Secondly, international trade has reduced the market power of domestic monopolies. Firms that are domestic monopolies were characterized as being price makers rather than price takers. Moreover, there was only a single large supplier for a particular product in the marketplace given that there were barriers to market entry. However, with the advent of international trade, the model of monopoly market structures changed. Most firms realized a reduction in their monopoly powers because of the emergence of liberalized practices brought forth by international trade (Sexton, 2010). To begin with, international trade has reduced the barriers that were likely to serve as a hindrance in joining a particular industry. For instance, barriers like high set-up costs and the high cost involved in advertising are no longer a hindrance because most of the multinational companies have a large capital outlay and are thus well established. Globalization of trade promoted liberalized practices like mergers, acquisitions, and even franchising thereby reducing the market power of monopolies. Consequently, monopolies can no longer exploit consumers because the entry of newer firms in the market takes away their power as price makers and they eventually become price takers like is the case in markets where there is perfect competition. The consumer surplus was greatly minimized because of the entry of new firms into the market thus, consumers are no longer exploited by monopolies. There is a significant producer surplus especially for those monopolies that have not adjusted their prices because the changes in the market structure have increased competition thus monopolies are unable to charge high prices and make exorbitant profits.
Thirdly, is the oligopoly market, which is characterized by a few, leading suppliers. According to Tucker (2013), firms within the oligopoly market structure tend to show so much interdependence. This means that when firms in oligopoly markets are making decisions they tend to rely on each other greatly. International trade has caused oligopolies to change its paradigm in the sense that it shows a mixture in its features. In this regard, it is common to find firms in oligopoly market structures also showing characteristics of monopolistic competition thus showing that their market power has reduced. Firms operating under oligopolies no longer have to show so much interdependence due to the globalization of trade. For instance, in the electronic industry there are major players like Apple and Samsung who tend to compete against each other in order to strengthen their market position (Tucker, 2013). As such, Apple and Samsung do not show interdependence while making their decisions. The two companies are also striving to produce a new product into the market so that they can gain an advantage of winning over the ‘early adopters’ of technology. Therefore, in as much as Apple and Samsung show some interdependence and maintain the features of oligopoly because of their small number, they adopt the features of monopolistic competition like that of making independent decisions in an attempt to strengthen the power which has been reduced due to international trade.
Finally, is the scenario where other market structures like those in perfect competition, monopolistic competition, and monopolies realize a change in a paradigm and they end up largely becoming oligopolies. For example, in the vehicle industry where there was perfect competition with large number of sellers, the market structure changed to that of olig...