Imperfect competition and intra - industry trade:

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 models with the assumption of perfect competition, it is assumed that production takes place with constant returns to scale. This means that the unit-cost of production remains constant as the scale of production increases. In other words, this assumes away  the possibility of economies of scale.

It is at this stage that  relaxation of the assumption of perfect competition becomes possible and a more real world situation of imperfect competition and economies of scale and  intra-industry trade (IIT) enter into the analysis. In  fact, the phenomenon of intra-industry trade remains unexplained by  the traditional trade theories.  Intra-industry trade implies that many countries export and import similar  products. A country may export and at the same time import cars, clothes, engineering goods, electronics, etc. It is possible  to argue that to some extent intra-industry trade arises because many different types of products are aggregated into one category or industry. Since different types of products are often aggregated into one category, it may seem as though the countries are exporting and importing identical products when in reality they are exporting one type of the product and importing another  type. This means that the phenomenon of IIT is susceptible  to the definition of an 'industry'.

Nevertheless, it  is possible to explain IIT with the help of determinants that include economies of scale, product-differentiation and imperfect markets even when there are similarities among countries. In addition, there are some very simple explanations of IIT  which  can  be  analysed  within  the types  of inter-industry trade models, for instance, transport costs, seasonal differences etc.