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Trade, competition, and efficiency


  • Behrens, Kristian
  • Murata, Yasusada


We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competitive effects. We show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging too high markups. We further illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility. As the population gets arbitrarily large in the integrated economy, the equilibrium utility converges to the optimal utility because of the competitive limit. We finally extend the variable elasticity model to a multi-sector setting, and show that intersectoral distortions are eliminated in the limit. The multi-sector model allows us to illustrate some new aspects arising from intersectoral and intrasectoral allocations, namely that trade leads to structural convergence, rather than sectoral specialization, and that trade induces domestic exit in the nontraded sector.

Suggested Citation

  • Behrens, Kristian & Murata, Yasusada, 2012. "Trade, competition, and efficiency," Journal of International Economics, Elsevier, vol. 87(1), pages 1-17.
  • Handle: RePEc:eee:inecon:v:87:y:2012:i:1:p:1-17 DOI: 10.1016/j.jinteco.2011.11.005

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    Cited by:

    1. Novy, Dennis, 2013. "International trade without CES: Estimating translog gravity," Journal of International Economics, Elsevier, vol. 89(2), pages 271-282.
    2. Bertoletti, Paolo & Epifani, Paolo, 2014. "Monopolistic competition: CES redux?," Journal of International Economics, Elsevier, vol. 93(2), pages 227-238.
    3. 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.
    4. Behrens, Kristian & Murata, Yasusada, 2012. "Globalization and individual gains from trade," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 703-720.
    5. Behrens, Kristian & Mion, Giordano & Murata, Yasusada & Suedekum, Jens, 2017. "Spatial frictions," Journal of Urban Economics, Elsevier, vol. 97(C), pages 40-70.
    6. Kristian Behrens & Giordano Mion & Yasusada Murata & Jens Südekum, 2014. "Trade, Wages, And Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 1305-1348, November.
    7. Bernard, Andrew B. & Jensen, J Bradford & Redding, Stephen J. & Schott, Peter K., 2016. "Global Firms," CEPR Discussion Papers 11555, C.E.P.R. Discussion Papers.
    8. Swati Dhingra & John Morrow, 2017. "Efficiency in Large markets with Firm Heterogeneity," CEP Discussion Papers dp1502, Centre for Economic Performance, LSE.
    9. 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.
    10. By Albert G. Schweinberger & Jens Suedekum, 2015. "De-industrialization and entrepreneurship under monopolistic competition," Oxford Economic Papers, Oxford University Press, vol. 67(4), pages 1174-1185.
    11. Hakan Yilmazkuday, 2017. "A Solution to the Missing Globalization Puzzle by Non-CES Preferences," Review of International Economics, Wiley Blackwell, vol. 25(3), pages 649-676, August.
    12. Paolo Bertoletti & Federico Etro, 2014. "Pricing to market in the Krugman model," Economics Bulletin, AccessEcon, vol. 34(1), pages 459-468.
    13. Igor A. Bykadorov & Alexey A. Gorn & Sergey G. Kokovin & Evgeny V. Zhelobodko, 2014. "Losses From Trade In Krugman’s Model: Almost Impossible," HSE Working papers WP BRP 61/EC/2014, National Research University Higher School of Economics.
    14. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, Elsevier.
    15. Spearot, Alan C., 2013. "Variable demand elasticities and tariff liberalization," Journal of International Economics, Elsevier, vol. 89(1), pages 26-41.
    16. Swati Dhingra & John Morrow, 2012. "The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition," FIW Working Paper series 088, FIW.
    17. repec:eee:reecon:v:71:y:2017:i:4:p:645-649 is not listed on IDEAS
    18. Yilmazkuday, Hakan, 2016. "Constant versus variable markups: Implications for the law of one price," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 154-168.
    19. repec:eee:reecon:v:71:y:2017:i:4:p:663-674 is not listed on IDEAS
    20. Kristian Behrens & Yasusada Murata, 2012. "Globalization and Individual Gains from Trade (revised version)," Cahiers de recherche 1218, CIRPEE.
    21. repec:eee:reecon:v:71:y:2017:i:4:p:718-728 is not listed on IDEAS

    More about this item


    Pro-competitive effects; Competitive limit; Excess entry; Trade and efficiency; Monopolistic competition;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation


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