Economies of Scale and Perfect Competition

It is worth noting that the assumption of economies of scale in production can represent a deviation away from the assumption of perfectly competitive markets. In most perfectly competitive models, it is assumed that production takes place with constant returns to scale (i.e. no economies). This means that the unit-cost of production remains constant as the scale of production increases. When that assumption is changed, it can open up the possibility of positive profits and strategic behavior among firms. Because there are numerous ways to conceive of strategic interactions between firms, there are also numerous models and results that could be obtained. To avoid some of these problems, a number of models have been developed which retain some of the key features of perfect competition while allowing for the presence of economies of scale as well.

International Trade Theory and Policy - Chapter 80-2: Last Updated on 2/15/07