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Non-homothetic preferences, parallel imports and the extensive margin of international trade

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  • Föllmi, Reto

    ()

  • Hepenstrick, Christian

    ()

  • Zweimüller, Josef

    ()

Abstract

We study international trade in a model where consumers have non-homothetic preferences and where household income restricts the extensive margin of consumption. In equilibrium, monopolistic producers set high (low) prices in rich (poor) countries but a threat of parallel trade restricts the scope of price discrimination between countries. The threat of parallel trade allows differences in per capita incomes to have a strong impact on the extensive margin of trade, whereas differences in population sizes have a weaker effect. We also show that the welfare gains from trade liberalization are biased towards rich countries. We extend our model to more than two countries; to unequal incomes within countries; and to more general specifications of non-homothetic preferences. Our basic results are robust to these extensions.

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Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1122.

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Length: 43 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:usg:econwp:2011:22

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Keywords: Heterogenous markups; non-homothetic preferences; parallel imports; extensive margin of trade.;

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References

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Citations

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Cited by:
  1. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers, Department of Economics - University of Zurich 115, Department of Economics - University of Zurich.
  2. Raphael A. Auer & Thomas Chaney & Philip Sauré, 2012. "Quality pricing-to-market," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 125, Federal Reserve Bank of Dallas.
  3. Christian Hepenstrick, 2010. "Per-capita incomes and the extensive margin of bilateral trade," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 519, Institute for Empirical Research in Economics - University of Zurich.
  4. Maria MASOOD, 2014. "New Evidence on Development and Cultural Trade: Diversification, Reconcentration and Domination," Working Papers, FERDI P85, FERDI.
  5. Hélène LATZER & Alexandre SIMONS, 2014. "Income distribution, multi-quality firms and patterns of trade," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2014003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  6. LATZER, Hélène & MAYNERIS, Florian, 2012. "Income distribution and vertical comparative advantage. Theory and evidence," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2012034, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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