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Efficiency Gaps, Love of Variety and International Trade

  • Catia Montagna

We develop a general equilibrium monopolistic competition model of trade with technical heterogeneity among firms and countries. With free entry, technical asymmetries between firms result in the endogenous determination of the equilibrium average efficiency of the industry. We show that trade reduces (increases) the minimum efficiency required to survive in the more (less) efficient country. This has important welfare implications: (1) Contrary to the constant elasticity of substitution homogeneous-firms model, trade affects welfare even when there is no love of variety. (2) There are circumstances in which trade liberalization leads to a loss of consumer welfare. Copyright 2001 by The London School of Economics and Political Science

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Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 090.

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Date of creation: Oct 1998
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Handle: RePEc:dun:dpaper:090
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  1. David Dollar & Edward N. Wolff, 1993. "Competitiveness, Convergence, and International Specialization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262041359, June.
  2. Mueller,Dennis C., 2009. "Profits in the Long Run," Cambridge Books, Cambridge University Press, number 9780521101592.
  3. Romer, Paul, 1994. "New goods, old theory, and the welfare costs of trade restrictions," Journal of Development Economics, Elsevier, vol. 43(1), pages 5-38, February.
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