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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. Raphael A. Auer & Thomas Chaney & Philip Sauré, 2012. "Quality pricing-to-market," Globalization and Monetary Policy Institute Working Paper 125, Federal Reserve Bank of Dallas.
  2. Maria MASOOD, 2014. "New Evidence on Development and Cultural Trade: Diversification, Reconcentration and Domination," Working Papers P85, FERDI.
  3. Hélène LATZER & Florian MAYNERIS, 2012. "Income distribution and vertical comparative advantage Theory and evidence," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2012018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 20 Oct 2012.
  4. Christian Hepenstrick, 2010. "Per-capita incomes and the extensive margin of bilateral trade," IEW - Working Papers 519, Institute for Empirical Research in Economics - University of Zurich.
  5. Claudia Bernasconi, 2013. "Similarity of income distributions and the extensive and intensive margin of bilateral trade flows," ECON - Working Papers 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) 2014003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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