International Trade and Firms' Heterogeneity under Monopolistic Competition
This article studies the interactions between international trade and firms' heterogeneity by proposing a tractable model consistent with the stylised facts. The model describes, in a general equilibrium framework, two economies producing and trading two goods, one homogeneous and the other differentiated. In the differentiated-good sector, firms are heterogeneous by their marginal cost, in a context of monopolistic competition with free-entry and exit. They incur a fixed production cost, but also a fixed cost if they choose to export. We show that trade in differentiated goods increases industry-wide efficiency, through two different logics: one defensive and import-driven; the other offensive and export-driven. Copyright Kluwer Academic Publishers 2002
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