ABSTRACT
It is our purpose to develop a new model of international trade in a context of increasing returns to scale. In constructing the model we are thoroughly conventional in con®ning attention to `egalitarian' or `representative agent' economies, that is, economies in which all agents have the same preferences, the same access to technologies and the same factor endowments; moreover, it is assumed that each agent is aware that he is part of an egalitarian economy.1 However, we avail ourselves of some little-known properties of such economies. Thus in representative-agent economies it is in each agent's interest to cooperate in forming a single utility-maximizing ®rm to produce those commodities subject to increasing returns. Moreover, under autarchic conditions, the monopoly ®rm will engage in marginal-cost pricing; see Kemp and Long (1992) and Kemp and Shimomura (1995). Under free trade, on the other hand, the several utility-maximizing monopolists (one for each trading country) are supposed to engage in a Cournot±Nash game in quantities.
