The Microeconomics of New Trade Models

I provide a uni ed framework to analyze models of monopolistic competition with firm heterogeneity a la Melitz under standard demands and any productivity distribution. By using this methodology, I disentangle the effects of trade liberalizations on the domestic market in terms of new export opportunities and tougher import competition. I show that while the former entails pro-competitive effects, contrary to what might be expected, tougher import competition has no impact on either domestic firms' prices, quantities or their survival productivity cutoff; it only affects the mass of domestic incumbents. The results applied to the case of two big economies imply that a unilateral liberalization only entails worse export conditions for the liberalizing country, thus explaining the Metzler paradox found under this setup. In a model in which firms have knowledge of their productivity and are heterogeneous, I show that the disciplinary effects from the import-competition channel are reactivated.