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Non-homothetic preferences, parallel imports and the extensive margin of international trade

  • Foellmi, Reto
  • Hepenstrick, Christian
  • Zweimüller, Josef

We study international trade in a model where consumers have non-homothetic preferences and where household income restricts the extensive margin of consumption. In equilibrium, monopolistic producers set high (low) prices in rich (poor) countries but a threat of parallel trade restricts the scope of price discrimination between countries. The threat of parallel trade allows differences in per capita incomes to have a strong impact on the extensive margin of trade, whereas differences in population sizes have a weaker effect. We also show that the welfare gains from trade liberalization are biased towards rich countries. We extend our model to more than two countries; to unequal incomes within countries; and to more general specifications of non-homothetic preferences. Our basic results are robust to these extensions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7939.

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Date of creation: Aug 2010
Handle: RePEc:cpr:ceprdp:7939
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