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The Elusive Pro-Competitive Effects of Trade

Author

Listed:
  • Costas Arkolakis
  • Arnaud Costinot
  • Dave Donaldson
  • Andrés Rodríguez-Clare

Abstract

We study the gains from trade liberalization in models with monopolistic competition, firm-level heterogeneity, and variable markups. For a large class of demand functions used in the international macro and trade literature, we derive a parsimonious generalization of the welfare formula in Arkolakis et al. (2012). We then use both estimates from micro-level trade data and evidence regarding firm-level pass-through to quantify the implications of this new formula. Within the class of models that we consider, our main finding is that gains from trade liberalization predicted by models with variable markups are equal to, at best, and slightly lower than, at worst, those predicted by models with constant markups. In this sense, pro-competitive effects of trade are elusive.

Suggested Citation

  • Costas Arkolakis & Arnaud Costinot & Dave Donaldson & Andrés Rodríguez-Clare, 2019. "The Elusive Pro-Competitive Effects of Trade," Review of Economic Studies, Oxford University Press, vol. 86(1), pages 46-80.
  • Handle: RePEc:oup:restud:v:86:y:2019:i:1:p:46-80.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx075
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    More about this item

    Keywords

    International trade; Monopolistic competition; Variable markups; Pro-competitive effect; Gravity models;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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