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Allocative Efficiency, Mark-ups, and the Welfare Gains from Trade

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  • Thomas J. Holmes
  • Wen-Tai Hsu
  • Sanghoon Lee

Abstract

This paper develops an index of allocative efficiency that depends upon the distribution of mark-ups across goods. It determines how changes in trade frictions affect allocative efficiency in an oligopoly model of international trade, decomposing the effect into the cost-change channel and the price-change channel. Formulas are derived shedding light on the signs and magnitudes of the two channels. In symmetric country models, trade tends to increase allocative efficiency through the cost-change channel, yielding a welfare benefit beyond productive efficiency gains. In contrast, the price-change channel has ambiguous effects on allocative efficiency.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19273.

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Date of creation: Aug 2013
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Handle: RePEc:nbr:nberwo:19273

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References

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  1. Alberto Salvo, 2010. "Inferring market power under the threat of entry: the case of the Brazilian cement industry," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 326-350.
  2. Ottaviano, Gianmarco Ireo Paolo & Thisse, Jacques-François, 1998. "Agglomeration and Trade Revisited," CEPR Discussion Papers 1903, C.E.P.R. Discussion Papers.
  3. Daniel Yi Xu, 2013. "Competition, Markups, and the Gains from International Trade," 2013 Meeting Papers 653, Society for Economic Dynamics.
  4. James A. Schmitz, Jr., 2005. "What determines productivity? lessons from the dramatic recovery of the U.S. and Canadian iron-ore industries following their early 1980s crisis," Staff Report 286, Federal Reserve Bank of Minneapolis.
  5. Chad Syverson, 2001. "Market Structure and Productivity: A Concrete Example," Working Papers 01-06, Center for Economic Studies, U.S. Census Bureau.
  6. Andrew Atkeson & Ariel Burstein, 2007. "Pricing-to-market, trade costs, and international relative prices," Working Paper Series 2007-26, Federal Reserve Bank of San Francisco.
  7. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  8. Beatriz de Blas & Katheryn Russ, 2010. "Understanding Markups in the Open Economy under Bertrand Competition," NBER Working Papers 16587, National Bureau of Economic Research, Inc.
  9. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
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Cited by:
  1. James A. Schmitz, Jr., 2012. "New and larger costs of monopoly and tariffs," Staff Report 468, Federal Reserve Bank of Minneapolis.
  2. Jonathan Eaton & Samuel Kortum, 2012. "Putting Ricardo to Work," Journal of Economic Perspectives, American Economic Association, vol. 26(2), pages 65-90, Spring.
  3. Robert C. Feenstra, 2014. "Restoring the Product Variety and Pro-competitive Gains from Trade with Heterogeneous Firms and Bounded Productivity," NBER Working Papers 19833, National Bureau of Economic Research, Inc.

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