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

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  • Reto Foellmi
  • Christian Hepenstrick
  • Josef Zweimüller

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 Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 497.

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Date of creation: Jul 2010
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Handle: RePEc:zur:iewwpx:497

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

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Citations

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Cited by:
  1. Hélène LATZER & Florian MAYNERIS, 2012. "Income distribution and vertical comparative advantage Theory and evidence," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2012018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 20 Oct 2012.
  2. Hepenstrick, Christian & Tarasov, Alexander, 2012. "Per capita income and the extensive margin of bilateral trade," Discussion Papers in Economics, University of Munich, Department of Economics 14231, University of Munich, Department of Economics.
  3. Raphael Anton Auer & Thomas Chaney & Philip Ulrich Sauré, 2012. "Quality Pricing-to-Market," Working Papers 2012-11, Swiss National Bank.
  4. Maria MASOOD, 2014. "New Evidence on Development and Cultural Trade: Diversification, Reconcentration and Domination," Working Papers, FERDI P85, FERDI.
  5. 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.
  6. 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).

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