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Trade, competition, and efficiency

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  • Behrens, Kristian
  • Murata, Yasusada

Abstract

We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competitive effects. We show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging too high markups. We further illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility. As the population gets arbitrarily large in the integrated economy, the equilibrium utility converges to the optimal utility because of the competitive limit. We finally extend the variable elasticity model to a multi-sector setting, and show that intersectoral distortions are eliminated in the limit. The multi-sector model allows us to illustrate some new aspects arising from intersectoral and intrasectoral allocations, namely that trade leads to structural convergence, rather than sectoral specialization, and that trade induces domestic exit in the nontraded sector.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 87 (2012)
Issue (Month): 1 ()
Pages: 1-17

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Handle: RePEc:eee:inecon:v:87:y:2012:i:1:p:1-17

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: Pro-competitive effects; Competitive limit; Excess entry; Trade and efficiency; Monopolistic competition;

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References

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Citations

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Cited by:
  1. Novy, Dennis, 2013. "International trade without CES: Estimating translog gravity," Journal of International Economics, Elsevier, vol. 89(2), pages 271-282.
  2. Swati Dhingra & John Morrow, 2012. "The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition," CEP Discussion Papers dp1130, Centre for Economic Performance, LSE.
  3. Behrens, Kristian & Mion, Giordano & Murata, Yasusada & Suedekum, Jens, 2008. "Trade, Wages, and Productivity," IZA Discussion Papers 3682, Institute for the Study of Labor (IZA).
  4. Marc J. Melitz & Stephen J. Redding, 2012. "Heterogeneous Firms and Trade," CEP Discussion Papers dp1183, Centre for Economic Performance, LSE.
  5. Kristian Behrens & Yasusada Murata, 2012. "Globalization and Individual Gains from Trade (revised version)," Cahiers de recherche 1218, CIRPEE.

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