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Trade, Competition, and Efficiency

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Author Info
Kristian Behrens
Yasusada Murata

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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-competition effects. We then show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging prices above marginal costs. Using pro-competitive effects and the competitive limit, we finally illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0940.

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Date of creation: 2009
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Handle: RePEc:lvl:lacicr:0940

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Related research
Keywords: Pro-competitive effects; competitive limit; excess entry; trade and efficiency; monopolistic competition;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies

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References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. Feenstra, R.C., 1995. "Estimating the Effects of Trade Policy," Papers 95-10, California Davis - Institute of Governmental Affairs.
    Other versions:
  3. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July. [Downloadable!] (restricted)
  4. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, vol. 35(1-2), pages 1-22, August. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. BEHRENS, Kristian & MURATA, Yasusada, 2006. "Gains from trade and efficiency under monopolistic competition: a variable elasticity case," CORE Discussion Papers 2006049, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  7. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring. [Downloadable!] (restricted)
  8. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. Jeffrey R. Campbell & Hugo A. Hopenhayn, 2005. "Market Size Matters," Journal of Industrial Economics, Blackwell Publishing, vol. 53(1), pages 1-25, 03. [Downloadable!] (restricted)
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  11. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November. [Downloadable!] (restricted)
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  12. 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. [Downloadable!] (restricted)
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  13. 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. [Downloadable!] (restricted)
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  14. Behrens, Kristian & Murata, Yasusada, 2007. "General equilibrium models of monopolistic competition: A new approach," Journal of Economic Theory, Elsevier, vol. 136(1), pages 776-787, September. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
  16. 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. [Downloadable!] (restricted)
  17. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," NBER Working Papers 14383, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Blackwell Publishing, vol. 75(1), pages 295-316, 01. [Downloadable!] (restricted)
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  19. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November. [Downloadable!] (restricted)
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This page was last updated on 2009-11-19.

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