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Structural Gravity and the Gains from Trade under Imperfect Competition

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  • Benedikt Heid
  • Frank Stähler

Abstract

We extend structural gravity models of bilateral trade flows to oligopolistic competition. We show that conventional gravity estimates do not only reflect trade costs but also market power. Our simple estimation procedure generalizes the standard gravity model and disentangles exogenous trade frictions and endogenous market power distortions. We use our estimated model to counterfactually increase trade costs by abolishing the European Single Market. We find that domestic firms’ markups in EU member countries increase by 2 to 6 percent. Importantly, welfare effects of trade liberalization are much more pronounced due to the change in competition among domestic and foreign firms.

Suggested Citation

  • Benedikt Heid & Frank Stähler, 2020. "Structural Gravity and the Gains from Trade under Imperfect Competition," CESifo Working Paper Series 8121, CESifo.
    • Handle: RePEc:ces:ceswps:_8121
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    More about this item

    Keywords

    trade; structural gravity; imperfect competition; market power;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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