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Monopolistic Competition, International Trade and Firm Heterogeneity - a Life Cycle Perspective

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Abstract

This paper presents a dynamic international trade model based on monopolistic competition, where observed intra-industry differences at a given point in time reflect different stages of the firm’s life cycle. New product varieties of still higher quality enter the market every period rendering old varieties obsolescent in a process of creative destruction. For given technology (variety) production costs decrease after an infant period due to learning. It is shown that several patterns of exports may arise depending primarily on the size of fixed trade costs. At a given point in time firms therefore differ due to different age, although all firms are symmetric in a life cycle perspective. The paper thus offers an alternative view on firm heterogeneity compared with other recent papers, where productivity differences appear as an outcome of a stochastic process.

Suggested Citation

  • Hansen, Jørgen Drud & Kvedaras, Virmantas & Nielsen, Jørgen Ulff-Møller, 2008. "Monopolistic Competition, International Trade and Firm Heterogeneity - a Life Cycle Perspective," Working Papers 08-7, University of Aarhus, Aarhus School of Business, Department of Economics.
  • Handle: RePEc:hhs:aareco:2008_007
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    File URL: http://www.hha.dk/nat/wper/08-7_jdhajum.pdf
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    References listed on IDEAS

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    1. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    2. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    3. Philippe Aghion & Christopher Harris & Peter Howitt & John Vickers, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Oxford University Press, vol. 68(3), pages 467-492.
    4. Montagna, Catia, 2001. "Efficiency Gaps, Love of Variety and International Trade," Economica, London School of Economics and Political Science, vol. 68(269), pages 27-44, February.
    5. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    6. C. Lanier Benkard, 2000. "Learning and Forgetting: The Dynamics of Aircraft Production," American Economic Review, American Economic Association, vol. 90(4), pages 1034-1054, September.
    7. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
    8. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
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    More about this item

    Keywords

    Product innovations; learning; creative destruction; firm heterogeneity; export performance;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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