| This thesis' research argues that international trade theory does not sufficiently take into account the realities faced in local markets. Every market is subject to a regulation of some sort, varying in intensity, that can distort international trade. The issue here is not to cast doubt on such local regulations, since they may be necessary for the proper operation of these markets (e.g., regulation of a local monopoly), but rather to study how a firm behaves when its production and sales in a regional market are regulated, but its trade between regional markets is not. Such a firm is thus a player in the global economy and must comply with rules enforced only at a local level. We represent this asymmetry by building a two-stage game-theoretic model where firms act in quantity, that is, they play a la Cournot. In the first stage, international trade is free, and in the second, the regional markets are regulated. Thus, trade dominates---anticipates---the supply of markets. This relatively general framework is highly applicable to electricity markets which, where they exist, are highly regulated. On the other hand, trade between markets is lightly regulated. This dichotomy allows large producers, with locally dominant positions, to exercise rent-seeking strategies, which mitigate the welfare-increasing effect of trade, and may even reverse it, such that trade destroys wealth. Given that international regulation can be difficult to implement, as it involves negotiations between countries with potentially contradictory objectives, the functional unbundling of production-operation and trading departments within electrical companies seems a coherent local alternative. |
