The automobile industry and new trade theory: A classroom experiment

In this study, the author describes a classroom experiment on new trade theory appropriate for undergraduate international economics and trade courses. Students portray U.S. and Japanese automobile manufacturers with different average cost schedules. There are five rounds in the experiment, starting with autarky in the 1960s and ending with the Great Recession of 2008–9. In each round, the instructor announces a market price and quantity and then each producer calculates its market share, average cost and profit; and makes its shutdown decision. By varying the market price and size, the experiment illustrates the gains from intra-industry trade and also how efficiency gains and economic recession impact individual firm performance.