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Measuring the gains from trade under monopolistic competition

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  • Robert C. Feenstra

Abstract

Three sources of gains from trade under monopolistic competition are (i) new import varieties available to consumers; (ii) enhanced efficiency as more productive firms begin exporting and less productive firms exit; (iii) reduced markups charged by firms due to import competition. The first source of gains can be measured as new goods in a CES utility function for consumers. We argue that the second source is formally analogous to the producer gain from new goods, with a constant‐elasticity transformation curve for the economy. We suggest that the third source of gain can be measured using a translog expenditure function for consumers, which, in contrast to the CES case, allows for finite reservation prices for new goods and endogenous markups. On identifie trois sources de gains en provenance du commerce international dans un régime de concurrence monopolistique: (1) nouvelles variétés d'importations disponibles pour les consommateurs; (2) efficacité accrue à proportion que les entreprises plus productives commencent à exporter et que les moins productives disparaissent; (3) réduction des marges bénéficiaires dans les prix des entreprises à cause de la concurrence des importations. La première source de gains peut être mesurée comme nouveaux produits dans une fonction d'utilité des consommateurs de type CES (i.e. où l'élasticité de substitution est constante). On suggère que la seconde source est analogue aux gains des producteurs en provenance des nouveaux biens avec une courbe de transformation de l'économie àélasticité constante. Quant à la troisième source, on suggère que les gains peuvent être mesurés en utilisant une fonction translog des dépenses des consommateurs, laquelle, contrairement au cas de la CES, permet de prendre en compte les prix minima qu'on est prêt à payer pour les nouveaux biens et les marges bénéficiaires dans les prix endogènes.

Suggested Citation

  • Robert C. Feenstra, 2010. "Measuring the gains from trade under monopolistic competition," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(1), pages 1-28, February.
  • Handle: RePEc:wly:canjec:v:43:y:2010:i:1:p:1-28
    DOI: 10.1111/j.1540-5982.2009.01577.x
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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