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Gains from trade and efficiency under monopolistic competition: a variable elasticity case

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  • BEHRENS, Kristian
  • MURATA, Yasusada

Abstract

We present a general equilibrium model of monopolistic competition with variable demand elasticities and investigate the impact of free trade on welfare and efficiency. First, contrary to the constant elasticity case, in which all gains from trade are due to increasing product diversity, our model features gains from pro-competitive effects. Second, we prove that the market outcome is not efficient because too many firms operate at an inefficiently small scale. Last, we illustrate that free trade raises efficiency by reducing the gap between the equilibrium utility and the optimal utility.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006049.

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Date of creation: 00 Jun 2006
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Handle: RePEc:cor:louvco:2006049

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Related research

Keywords: international trade; monopolistic competition; variable elasticity; gains from trade; efficiency.;

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References

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  1. J. Peter Neary, 2000. "Monopolistic Competition and International Trade Theory," Working Papers 200025, School Of Economics, University College Dublin.
  2. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," Econometric Society 2004 North American Summer Meetings 508, Econometric Society.
  3. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, January.
  4. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
  5. Robert C. Feenstra, 1995. "Estimating the Effects of Trade Policy," NBER Working Papers 5051, National Bureau of Economic Research, Inc.
  6. J.Peter Neary, 2003. "Globalisation and Market Structure," DNB Staff Reports (discontinued) 100, Netherlands Central Bank.
  7. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009 Elsevier.
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  9. Brakman, Steven & Heijdra, Ben J., 2002. "The monopolistic competition revolution in retrospect," CCSO Working Papers 200215, University of Groningen, CCSO Centre for Economic Research.
  10. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  11. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  12. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, vol. 35(1-2), pages 1-22, August.
  13. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October.
  14. Lawrence, Colin & Spiller, Pablo T, 1983. "Product Diversity, Economies of Scale, and International Trade," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 63-83, February.
  15. Harrison, Ann E., 1994. "Productivity, imperfect competition and trade reform : Theory and evidence," Journal of International Economics, Elsevier, vol. 36(1-2), pages 53-73, February.
  16. Horstmann, Ignatius J. & Markusen, James R., 1986. "Up the average cost curve: Inefficient entry and the new protectionism," Journal of International Economics, Elsevier, vol. 20(3-4), pages 225-247, May.
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Cited by:
  1. Kristian Behrens & Yasusada Murata, 2011. "Trade, Competition, and Efficiency (revised version)," Cahiers de recherche 1118, CIRPEE.
  2. Kristian Behrens & Yasusada Murata, 2009. "Trade, Competition, and Efficiency," Cahiers de recherche 0940, CIRPEE.
  3. Sylvain Barde, 2008. "A Generalised Variable Elasticity of Substitution Model of New Economic Geography," Documents de Travail de l'OFCE 2008-33, Observatoire Francais des Conjonctures Economiques (OFCE).

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