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Dynamic Gains from International Trade with Imperfect Competition and Market Power

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  • Devereux, Michael B
  • Lee, Khang Min

Abstract

This paper revisits the gains from trade under imperfect competition by explicitly modeling strategic competition and entry. The papers highlights a welfare cost of imperfect competition, due to inefficiently high entry. Through increasing competition, international trade lowers price-cost markups and reduces excessive entry. This adds on a "competitive" channel for gains from trade to the well-known "product diversity" channel from previous literature. Both channels will increase the return to investment and raise the steady-state capital stock. An alternative case is possible, however, where there is inefficiently low entry. In that case, trade tends to be "anticompetitive," raising price-cost markups and encouraging increased entry. Copyright 2001 by Blackwell Publishing Ltd

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 5 (2001)
Issue (Month): 2 (June)
Pages: 239-55

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Handle: RePEc:bla:rdevec:v:5:y:2001:i:2:p:239-55

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Cited by:
  1. Ester Faia, 2009. "Oligopolistic Competition and Optimal Monetary Policy," Kiel Working Papers 1552, Kiel Institute for the World Economy.
  2. Lewis, Vivien & Poilly, CĂ©line, 2012. "Firm entry, markups and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 670-685.
  3. Colciago, Andrea & Etro, Federico, 2007. "Real Business Cycles with Cournot Competition and Endogenous Entry," MPRA Paper 7326, University Library of Munich, Germany, revised 25 Feb 2008.

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