Introduction

We remarked in Chapters 2 and 3 on the growth of large-scale technologies, that is, technologies requiring large-scale production to achieve efficiency. However, large firms may be more efficient than small ones for reasons that go beyond the purely technological. These have to do with superior abilities in one or more areas: sustaining active research and development programs, which are particularly important in rapidly changing product lines; maintaining a distribution and service network, which is important for consumer durables; and, sometimes, arranging access to financial markets.

This chapter develops the implications of economies of scale-arising for whatever reason – for the organization of international trade. In particular, we substantiate two assertions made in Chapter 3. One was that there may be no prices at which international markets clear. The other was that one can naturally develop from this framework an approach to the analysis of managed trade.

Nonexistence of market-clearing prices

In economies with increasing returns there may be no prices at which markets clear-it may not be possible to balance supply and demand. Furthermore, the economy may actually tend to stabilize around a nonmarket- clearing position. This leads to a stable configuration in which markets, however, do not clear. We call this a “stable disequilibrium.”

This point is illustrated by reference to an economy where two pricetaking firms produce a single output from a single input. One firm produces under traditional conditions of diminishing returns to scale.