In the oligopoly market, a small number of firms significantly influence each other the influence of each firm relates to the concept of prisoner dilemma that if one out of two firms

1 QUESTION 1: Prisoner Dilemma In the oligopoly market, a small number of firms significantly influence each other The influence of each firm relates to the concept of Prisoner Dilemma that if one out of two firms in oligopolies takes the optimal action for itself, the outcome would be worse for both firms Moreover, if both firms take the optimal action simultaneously, the outcome would be the same for both (McLaren 2012, p 57) Assumption 30 Profit in Autarky 60 Additional profit from export 18 22 Profit from the competition Profit from the export plus competition Figure 1.1: Assumption and Profit following Prisoner Dilemma (2) presents the case TS does not export but XD does, XD profit then will be 360 (300 Autarky plus 60 export) In contrast, TS’s domestic profit reduces to 180 due to the market having new competition The case happens vice versa for (3) However, whether TS does export or not, the optimal option of XD is to export since 360 is higher than 300 Autarky If TS also chooses the same strategy, XD and TS will meet at (4) That is when both firms trade simultaneously, both earn 220 each instead of 360 because they earn from export but not as much as domestic losses from the competition Moreover, obviously making 220 is better than 180 (profit from doing nothing and foreign firm are going to conquer the local market) In short, under free trade within the situation of Prisoner Dilemma, regardless of the action of the competitor in the oligopoly, both firms will take the dominant option that is to trade than nothing, otherwise, the outcome will be lower for both Cournot model and the welfare analysis Assuming that marginal cost is 5000 USD, transportation costs for each unit is 1500 USD Also, assuming that the price of the car is the same in both countries since they share the same demand curve and react based on the cournot model on that demand curve Case 1: No transportation costs If there are no transportation costs, the surplus of the consumers will be increased since they can consume with a lower price ($7500 > $6700) compared to autarky Accordingly, the profits of the firms will be decreased because even though they sell more cars (5/4m to 5/3m), the price of the cars has decreased in larger degree ($7500 to $6700) The grey area in figure 1.2, total revenue, had decreased from $3125 (Autarky) to $2833 (Trade) after the trade without transportation costs Figure 1.2: TS profit in Autarky and Trading with no transportation cost Case 2: Transportation costs exist Figure 1.3: Reaction function Figure 1.4: Consumer surplus in Autarky vs Trade with transportation cost Figure 1.5: Profit of TS in Autarky and Trade with transportation cost Figure 1.6: Net welfare in trade If there are transportation costs, consumer surplus increases and the firms’ profits decrease In this case, the reaction function of XD, figure 1.3, shows larger selling compared to that of autarky(5/4mil to 17/12mil) Moreover, the price for the cars would be lowered from $7500 to $7180 As seen on the figure 1.5 comparison, A will be the loss from the firms’ profits since they lower the price from the autarky Moreover, due to the transportation costs, they lose D However, compared to autarky, they export goods to each other, and they gain profits from export revenue minus transportation costs, which is C Therefore, the consumer surplus will rise as depicted in figure 1.4 In autarky, deadweight loss is higher than that of trade because firms are changed from monopolists who charge higher price to their product, to participants of competition who make price based on equilibrium of market supply and demand Therefore, the price after trade will be lowered, hence deadweight loss reduces and eventually beneficial for society welfare (figure 1.6) QUESTION 2: McLaren (2012) pointed out that a specific model is when the determinant of manufacturing cannot be altered across industries Also, there are few or all factors of manufacturing in the model that are distinguished, and it can be known as a specific factors model (McLaren 2012) Labor is a mobile factor that can motivate freely through industries Assuming that land-A and capital-K are specific since each kind of capital and land are made for a particular manufacturing process, textile requires (labor) L and (capital) K and sugar requires land-A and labor-L Profit-maximizing conditions require both sectors to choose the output level since labor usage level as wage should be equal to the MVPL of both industries (w = pSMPLS(LS/A) = pTMPLT(LT/K)) Nevertheless, if an administration does not dictate the tariff on imported products, the demand of consumers will be higher, which means that they will ask the government for their demand satisfaction Moreover, due to the domestic supply being low, there is an existence of excessing demand Based on Toppr (n.d.), when consumers seek for lower-price products and competition between customers occurs, it leads to a rise in prices Thus, other suppliers will take advantage of hoping to gain more profit from it Figure 2.1: Equilibrium with the mixed specific-factors model Figure 2.2: Effect of Tariff Because Sugar industry in Vietnam has a comparative disadvantage, we should import sugar and Vietnam will export their comparative advantage product is textile (McLaren 2012) Thus, when the government imposes a tariff on imports that affect consumer price p S, pT is unchanged Suppose that the government reduces the import tariff by 50%, makes p S decrease by 50% and that shifts the MVPLS to the left proportionally by 50% and meets at point Y However, the new equilibrium (Z) went up and to the left compared to Y Thus, the wage declined but less than 50% Due to the decline of tariff, the wage decreased to W’ but the real wage in respect of sugar increases to W' 0.5 p S so the sugar intercept after reducing tariff is greater than its current tariff Since pT is unchanged, the real wage regarding textile W' pT decrease so the textile intercept after reducing the tariff is smaller than its current tariff Sugar w’/Ps w/Ps Free worker’s budget line after reducing tariff Free worker’s budget line under old tariff w’/PT w/PT Textile Figure 2.3: The effect of reducing tariff on the free-worker’s budget lines Thus, the free workers have both higher and lower utility after reducing tariffs Noticeably, looking at figure 3, the more essential in the consumption bundle of textile the more likely that they are worse-off and the more essential in the consumption bundle of sugar the more likely that they are better-off Considering the welfare of workers and firms, the boundary of the area of Vietnam farmer’s sugar income in figure2 shifts down by 50% and the lower boundary also shifts down but less than 50% so the whole area would decrease less than 50% Thus if the Vietnam farmer’s sugar income denote by IS so IS decreased and the pT is remained so S p IS decreased The budget T p line of Vietnam farmer’s was shifted in Figure 2.4: Vietnam farmer’s budget line 10 Figure 2.5: Vietnam capitalist’s budget line pS decreases while pT is unchanged so Vietnam capitalist’s income increases in terms of both goods, thus the budget line shifts outward Figure 2.6: Welfare effects 11 According to The Worldbank (2020), Vietnam’s GDP is around $200billion compared to the world’s GDP is nearly $85trillion so Vietnam is considered as a small country compared to the world’s economy Following figure12, tariffs make Vietnam's sugar industry overproduction and underconsumption which are social welfare costs to Vietnam and gain from terms-of-trade benefit However, as a small-eco, its gain is not large enough and likely to-be insignificant or not better-off to the whole eco-development However, the reason that the Vietnam government should maintain tariffs or accept the appeal of the Association of Sugar Products of Vietnam selling protection to the interest group The government is a part of sugar producers- the biggest gain by tariffs They maximize not social welfare but put more weight on social welfare of the interest group relative to the products which were imposed by tariffs Nevertheless, in the longterm when our sugar industry becomes larger, reducing the tariff or even no tariff to gain termof-trade benefit Hence, in 2007 Vietnam join FTAs with Euro and become the largest exporters goods of among 10ASEAN countries to EU since 2015 that support Vietnam effort to enhance the economy for benefit of their people (Delegation of the European Union to Vietnam 2019) QUESTION 3: Vietnam’s trading partner Based on the total value of import and export of Vietnam, Japan is one of the top 10 leading countries which trade with Vietnam in 2018 (OEC n.d.), which accounts for 7.9% out of the sum of value trade (Best Care Shipping 2015) Skilled or unskilled labor abundant According to McLaren (2012), the skilled labour is the worker with a college degree The percentage of workers who have college degrees in Japan in 2010 is 83% of the total population of Japan (OECD n.d.) However, that of Vietnam in 2013 is 26% of the total population of Vietnam (OECD n.d.) Moreover, based on OEC (n.d.) the most specialized products of Vietnam are mainly ingredients for food, fabric and goods that need low-level of processing However, those of Japan tend to be more focused on goods that need more sophisticated levels of processing like chemicals and watch movements Therefore, with these two pieces of evidence, Japan is more focusing on skilled labour than Vietnam 12 Figure 3.1: Most-specialized-products of Vietnam and Japan (Source: OEC, n.d.) Heckscher-Ohlin model McLaren (2012) pointed out that the Heckscher-Ohlin model (HOM) is the easiest way to determine the labor market’s problems affected by globalization HOM can be understood as a comparative advantage model between countries (McLaren 2012) Also, it is acknowledged that whether countries are abundant in which factors, they may manufacture and export their incentives products Based on VnEconomy (2018), Vietnam exports textile; kinds of transport and replaced parts; equipment and tools; seafood; wood products - which are primarily exported products to Japan Trinh (2020) indicated that the textile industry is one of the key sectors in Vietnam representing 16% of GDP Furthermore, Koushan (2018) stated that lack of skilled-employment is one of the key factors that Vietnam’s labor market is faced The shortage of technology, vocational and technical skills lowers Vietnam competitiveness and decreases economic growth (Koushan 2018) Hence, according to the Heckscher-Ohlin model (HOM) theory, Vietnam’s textile industry is known as an unskilled labor abundant which exports unskilled-incentives goods 13 Moreover, machinery and equipment, computers and electronics devices (industrial field); plastics items; iron and steel are products exported to Vietnam by Japan (VnEconomy 2018) According to Nordea (2020), an industrial sector - one of the main fields in Japan, which ranges from paper to biotechnology or artificial intelligence, accounting for 29.1% of GDP Nordea (2020) also declared that Japan is a home of manufacturing electronic items Also, this industry plays an essential role for the country's modernization and industrialization (International Labour Organization 2014) In short, based on the concept of HOM, Japan’s industrial sector is acknowledged as a skilled labor abundant which imports skilled-incentives products Samuelson-Stolper Theorem Figure 3.2: Gini index of Vietnam in the last 20 years Figure 3.3: Gini index of Japan in the last 20 years 14 Figure 3.4: Japan export of Machinery and Equipment Samuelson-Stolper Theorem is the case when a country trades, income of abundant factor increases while income of scarce factor decreases resulting in increased inequality (McLaren 2012) Vietnam and Japan had an opposite level of Gini index that Vietnam reached the highest of 39.3 in 2010 while Japan slump to the lowest of 32.1 in 2011 (figure 3.2, 3.3) Regarding Vietnam with unskilled-labor abundant, textiles - incentive goods of Vietnam was export the most (up 23% from 2009 to $9.2 billion) (Vietnam Trade Promotion Agency 2011) which means the aggregate demand of textile increase lead to relative price increase, hence benefit the unskilled labor to raising their income and hurts income of skilled workers As a result, making a greater gap in income distribution among abundant and scarce labor Regarding Japan, due to change in educational policy and an aging population, the supply and demand have increased simultaneously which make the relative price for skilled workers stay the same (Kawaguchi and Mori, 2018) while income minimum wage also increases (Mitsumaru K et al 2016) which is more beneficial for lower-wage workers Thus, income inequality falls eventually Until 2010, skilled-intensive goods exports decreased (figure 3.4) due to Japan's economy being hard hit by Tsunami (Associated Press 2011), which hurt the relative skilled wages to decrease, hence the Gini index fell to the lowest In short, change in income distribution is the effect of trading among two countries in which the increase of abundant labor’s wage affects the scarce labor’s wage 15 REFERENCES LIST: Associated Press 2011, ‘Japanese earthquake and tsunami causes fall in exports’, The Guardian, 20 April, viewed 18 Dec 2020, Best Care Shipping 2015, Vietnam’s 10 biggest trading partners, Best Care Shipping, viewed 15 December 2020, Delegation of the European Union to Vietnam 2019, GUIDE TO THE EU-VIETNAM TRADE AND INVESTMENT AGREEMENTS, Delegation of the European Union to Vietnam, viewed 19 December 2020, Fred, 2020, GINI Index for Japan, Fred, viewed 18 Dec 2020, International Labour Organization 2014, SKILLED LABOUR A determining factor for sustainable growth of the nation, International Labour Organization, viewed 19 December 2020, Koushan, D 2018, ‘Labor Market Trends in Vietnam’, Vietnam Briefing, 29 June, viewed 18 December 2020, Kawaguchi Daiji & Mori Yuko 2008, Stable Wage Distribution in Japan, 1982-2002: A Counter Example for SBTC?, Discussion papers 08-E-020, Research Institute of Economy, Trade and Industry (RIETI) Mitsumaru K et al 2016, The Gini Coefficient and Economic Inequality in Japan , Daiwa Institute of Research, viewed 18 Dec, 2020, McLaren, J 2012, International Trade, Wiley, ProQuest EBook Central database.(p89) 17 Nordea 2020, The economic context of Japan, Nordea, viewed 19 December 2020, Nordea 2020, Foreign trade figures of Vietnam, Nordea, viewed 19 December 2020, OEC n.d., Profile country - Vietnam, OEC, viewed 15 December 2020, OECD n.d., World Indicators of Skills for Employment : Country tables; Japan, OECD, viewed 19 Dec 2020, OECD n.d., World Indicators of Skills for Employment : Country tables; Vietnam, OECD, viewed 19 Dec 2020, OEC n.d., Profile country - Japan, OEC, viewed 15 December 2020, Trinh, N 2020, ‘Seizing Investment Opportunities in Vietnam’s Garment and Textile Industry’, Vietnam Briefing, August, viewed 18 December 2020, 18 Trading Economics, 2020, Vietnam - GINI Index, Trading Economics, viewed 18 Dec 2020 Trading Economics, 2020, Japan Exports of Machinery & Transport Equipment, viewed 18 Dec 2020, The Worldbank 2020, GDP(constant 2010 US$) -Vietnam, The Worldbank, viewed 16 December 2020, The Worldbank 2020, GDP(constant 2010 US$) - World, The Worldbank, viewed 16 December 2020, Vietnam Trade Promotion Agency, 201, Vietnam’s textiles and garments export in the first months of 2011, viewed 18 Dec, 2020 VnEconomy 2018, ‘Japan became the fourth largest trading partner in Vietnam’, VJCC, June, viewed 18 December 2020, 19 APPENDICES: Calculation for question 1b 20 Appendix 21 Appendix 22 Appendix 23 Appendix 24 ... Prisoner Dilemma In the oligopoly market, a small number of firms significantly influence each other The influence of each firm relates to the concept of Prisoner Dilemma that if one out of two. .. the situation of Prisoner Dilemma, regardless of the action of the competitor in the oligopoly, both firms will take the dominant option that is to trade than nothing, otherwise, the outcome... McLaren (2012) pointed out that a specific model is when the determinant of manufacturing cannot be altered across industries Also, there are few or all factors of manufacturing in the model that