Introducing Imperfect Competition in CGE Models: Technical Aspects and Implications

This paper considers the technical aspects and the consequences, in terms of simulation re- sults and policy assessment, of introducing imperfect competition in a CGE model. The modifications to the standard CGE framework needed to model imperfect competition in some industries are briefly discussed. Next, the paper examines whether, how much and why, those changes may affect the quali- tative output a typical simulation experiment. It is argued that technical choices made in designing the model structure may have a significant impact on the model behavior. This is especially evident when the model output of an imperfect competition closure is compared with the one of a standard closure, assuming perfect competition. As an illustration, a simulation of agricultural trade liberalization is analyzed. Results from the same simulation exercise, but produced by alternative model formulations (one standard competitive and three imperfect competition variants) are presented and discussed. It is found that having imperfect competition in a CGE model does matter in terms of simulation results. Furthermore, alternative formulations of imperfect competition typically bring about quite different findings and implications.