Endogenous Market Structures and International Trade. I: Theory
AbstractWith 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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Bibliographic InfoPaper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2012:31.
Date of creation: 2012
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More information through EDIRC
Gains from trade; Krugman model; Endogenous entry; Comparative advantage; Comparative preference;
Find related papers by JEL classification:
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
- NEP-COM-2013-01-07 (Industrial Competition)
- NEP-INT-2013-01-07 (International Trade)
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