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Endogenous Market Structures and International Trade. I: Theory

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  • Federico Etro

    ()
    (Department of Economics, University Of Venice Cà Foscari)

Abstract

With strategic interactions and endogenous entry in a market, opening up to trade creates gains under very general conditions. Under Dixit-Stiglitz preferences and Cournot (or Bertrand) competition, an expansion of the market size induces exit of domestic firms, lower prices and larger production of the surviving firms due to competition from more foreign firms, without resorting to selection effects à la Melitz. This holds also in a 2x2x2 Heckscher-Ohlin model with Cournot (or Bertrand) competition in a sector. I study heterogenous preferences between countries as a source of trade: the country with a relative preference for the differentiated goods becomes a net importer of them facing radical business destruction. Finally, I extend the model to cost heterogeneity à la Melitz. In all cases, the elasticity of the number of firms to market size decreases with the substitutability between goods and reaches 1/2 under Cournot competition with homogenous goods.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2012/WP_DSE_etro_31_12.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2012:31.

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Length: 38
Date of creation: 2012
Date of revision:
Handle: RePEc:ven:wpaper:2012:31

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Keywords: Gains from trade; Krugman model; Endogenous entry; Comparative advantage; Comparative preference;

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