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International Trade with Indirect Additivity


  • Paolo Bertoletti
  • Federico Etro
  • Ina Simonovska


We develop a general equilibrium model of trade that features "indirectly additive" preferences and heterogeneous firms. Monopolistic competition generates markups that are increasing in firm productivity and in destination country per capita income, but independent from destination population, as documented empirically. The gains from trade liberalization are lower than in models based on CES preferences, and the difference is governed by the average pass-through. When we calibrate the model so as to match observed pricing-to-market in micro-data, it generates welfare gains that are substantially lower than those predicted by commonly employed frameworks.

Suggested Citation

  • Paolo Bertoletti & Federico Etro & Ina Simonovska, 2018. "International Trade with Indirect Additivity," American Economic Journal: Microeconomics, American Economic Association, vol. 10(2), pages 1-57, May.
  • Handle: RePEc:aea:aejmic:v:10:y:2018:i:2:p:1-57
    Note: DOI: 10.1257/mic.20160382

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    References listed on IDEAS

    1. Etro Federico, 2010. "Endogenous Market Structures and International Trade," Working Papers 2010_26, Department of Economics, University of Venice "Ca' Foscari".
    2. Paolo Bertoletti & Federico Etro, 2018. "Monopolistic Competition with GAS Preferences," DEM Working Papers Series 165, University of Pavia, Department of Economics and Management.
    3. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
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    Cited by:

    1. Feenstra, Robert C., 2018. "Restoring the product variety and pro-competitive gains from trade with heterogeneous firms and bounded productivity," Journal of International Economics, Elsevier, vol. 110(C), pages 16-27.
    2. Lilia Cavallari & Federico Etro, 2018. "Demand, Markups and the Business Cycle," Working Papers - Economics wp2018_30.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    3. Kiminori Matsuyama, 2019. "Engel's Law in the Global Economy: Demand‐Induced Patterns of Structural Change, Innovation, and Trade," Econometrica, Econometric Society, vol. 87(2), pages 497-528, March.
    4. Matsuyama, Kiminori, 2017. "Geographical advantage: Home market effect in a multi-region world," Research in Economics, Elsevier, vol. 71(4), pages 740-758.
    5. Nocco, Antonella & Ottaviano, Gianmarco I.P. & Salto, Matteo, 2017. "Monopolistic competition and optimum product selection: Why and how heterogeneity matters," Research in Economics, Elsevier, vol. 71(4), pages 704-717.
    6. Nocco, Antonella & Ottaviano, Gianmarco I.P. & Salto, Matteo, 2019. "Geography, competition, and optimal multilateral trade policy," Journal of International Economics, Elsevier, vol. 120(C), pages 145-161.
    7. Lilia Cavallari & Federico Etro, 2017. "Demand, Markups and the Business Cycle. Bayesian Estimation and Quantitative Analysis in Closed and Open Economies," Working Papers 2017:09, Department of Economics, University of Venice "Ca' Foscari".
    8. Nelson Lind & Natalia Ramondo, 2018. "Trade with Correlation," 2018 Meeting Papers 627, Society for Economic Dynamics.
    9. Federico J. Diez & Jesse Mora & Alan C. Spearot, 2016. "Firms in international trade," Working Papers 16-25, Federal Reserve Bank of Boston, revised 01 Dec 2016.
    10. Dhingra, Swati & Morrow, John, 2017. "Efficiency in large markets with firm heterogeneity," Research in Economics, Elsevier, vol. 71(4), pages 718-728.
    11. Jung, Jae Wook & Simonovska, Ina & Weinberger, Ariel, 2019. "Exporter heterogeneity and price discrimination: A quantitative view," Journal of International Economics, Elsevier, vol. 116(C), pages 103-124.
    12. Bastos, Paulo & Silva, Joana, 2010. "The quality of a firm's exports: Where you export to matters," Journal of International Economics, Elsevier, vol. 82(2), pages 99-111, November.
    13. Fally, Thibault, 2019. "Generalized separability and the gains from trade," Economics Letters, Elsevier, vol. 178(C), pages 8-12.
    14. Ciani, Andrea, 2017. "Income inequality and the quality of imports," DICE Discussion Papers 245, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    15. Lionel Fontagné & Houssein Guimbard & Gianluca Orefice, 2019. "Product-level Trade Elasticities," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02444897, HAL.
    16. Nelson Lind & Natalia Ramondo, 2018. "Trade with Correlation," NBER Working Papers 24380, National Bureau of Economic Research, Inc.
    17. Etro, Federico, 2017. "The Heckscher–Ohlin model with monopolistic competition and general preferences," Economics Letters, Elsevier, vol. 158(C), pages 26-29.
    18. Thibault Fally, 2018. "Integrability and Generalized Separability," NBER Working Papers 25025, National Bureau of Economic Research, Inc.
    19. Etro, Federico, 2019. "Monopolistic competition for the market with heterogeneous firms," Economics Letters, Elsevier, vol. 179(C), pages 9-12.

    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets


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