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Dynamic Gains from International Trade with Imperfect Competition and Market Power

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  • Devereux, Michael B
  • Lee, Khang Min

Abstract

This paper revisits the gains from trade under imperfect competition by explicitly modeling strategic competition and entry. The papers highlights a welfare cost of imperfect competition, due to inefficiently high entry. Through increasing competition, international trade lowers price-cost markups and reduces excessive entry. This adds on a "competitive" channel for gains from trade to the well-known "product diversity" channel from previous literature. Both channels will increase the return to investment and raise the steady-state capital stock. An alternative case is possible, however, where there is inefficiently low entry. In that case, trade tends to be "anticompetitive," raising price-cost markups and encouraging increased entry. Copyright 2001 by Blackwell Publishing Ltd

Suggested Citation

  • Devereux, Michael B & Lee, Khang Min, 2001. "Dynamic Gains from International Trade with Imperfect Competition and Market Power," Review of Development Economics, Wiley Blackwell, vol. 5(2), pages 239-255, June.
  • Handle: RePEc:bla:rdevec:v:5:y:2001:i:2:p:239-55
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    Cited by:

    1. Holmes, Thomas J. & Hsu, Wen-Tai & Lee, Sanghoon, 2014. "Allocative efficiency, mark-ups, and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 94(2), pages 195-206.
    2. Lewis, Vivien & Poilly, CĂ©line, 2012. "Firm entry, markups and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 670-685.
    3. Lewis, Vivien & Winkler, Roland, 2015. "Fiscal policy and business formation in open economies," Research in Economics, Elsevier, vol. 69(4), pages 603-620.
    4. Colciago, Andrea & Etro, Federico, 2010. "Real business cycles with Cournot competition and endogenous entry," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1101-1117, December.
    5. Faia, Ester, 2012. "Oligopolistic competition and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1760-1774.
    6. Antonio Minniti, 2009. "Growth, Inter-Industry And Intra-Industry Competition And Welfare," The Japanese Economic Review, Japanese Economic Association, vol. 60(1), pages 110-132.
    7. Kazuyoshi Ohki, 2016. "Welfare analysis and policy implications in Melitz-type model where markup differs across industries," ISER Discussion Paper 0984, Institute of Social and Economic Research, Osaka University.
    8. Beatriz de Blas & Katheryn N. Russ, 2015. "Understanding Markups in the Open Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 157-180, April.

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