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Geography, competition and optimal multilateral trade policy

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  • Antonella Nocco
  • Gianmarco I. P. Ottaviano
  • Matteo Salto

Abstract

How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across firms and countries. We use `disadvantaged' to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost firms to all countries, but especially to disadvantaged ones; trim the sales of high cost firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough.

Suggested Citation

  • Antonella Nocco & Gianmarco I. P. Ottaviano & Matteo Salto, 2019. "Geography, competition and optimal multilateral trade policy," CEP Discussion Papers dp1610, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1610
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    Cited by:

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    3. Atsushi Tadokoro, 2021. "Efficient policy with firm heterogeneity and variable markups," Discussion Papers in Economics and Business 20-17, Osaka University, Graduate School of Economics.

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    More about this item

    Keywords

    International trade policy; monopolistic competition; firm heterogeneity; pricing to market; multilateralism;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D6 - Microeconomics - - Welfare Economics
    • F1 - International Economics - - Trade
    • L0 - Industrial Organization - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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